Fair Value Under Ind AS 113: Level 1, 2 and 3 Inputs Explained

If your company holds investments, property, financial instruments, or assets acquired in a business combination, Ind AS 113 tells you how to measure their fair value — and crucially, how to tell your auditor and readers which data you used to arrive at that number. Fair value under Ind AS 113 is the price you would receive to sell an asset (or pay to transfer a liability) in an orderly transaction between market participants on the measurement date. The standard does not tell you when to use fair value — other Ind AS standards do that — but it gives you the single, consistent method for arriving at the number once you know you need it.

Why the Fair Value Hierarchy Exists

Not every asset has a live market price. A listed share on NSE has one. An unlisted startup equity stake does not. Ind AS 113 creates a three-level hierarchy to rank the quality of inputs you use. The rule is simple: always use the highest level of inputs available. A higher level means more objectivity and less room for manipulation. Your auditor, your audit committee, and eventually SEBI or MCA will check whether you correctly classified your inputs.

Level 1 Inputs: Quoted Prices in Active Markets

Level 1 inputs are unadjusted quoted prices for identical assets or liabilities in active markets that you can access on the measurement date. This is the gold standard.

• Shares listed on BSE or NSE — you use the closing market price on the measurement date.
• Government securities (G-Secs) traded on the RBI's NDS-OM platform.
• Commodity futures traded on MCX where there is sufficient volume and frequency.

Level 1 gives you almost no discretion. If the NSE closing price of a share is ₹450 and you hold 10,000 shares, the fair value is ₹45,00,000. Full stop. You cannot argue the block size would depress the price — Ind AS 113 requires you to use the unit of account (individual share) for Level 1, not a blockage discount.

Level 2 Inputs: Observable but Not Quoted Directly

Level 2 inputs are observable market data other than quoted prices included in Level 1. They apply to assets or liabilities that are similar (not identical) or where the market is not active enough to qualify as Level 1.

• Interest rate swaps valued using the benchmark yield curve (e.g., MIBOR or SOFR-linked rates published by FBIL).
• Corporate bonds not actively traded, priced using quoted prices of similar bonds with adjustments for credit spread.
• Investment property in a locality where there are recent, comparable arm's-length transactions but not a continuously quoted price.
• Foreign currency forward contracts priced using observable spot rates and forward points.

With Level 2, you are doing a calculation — but the inputs to that calculation come from the market, not your head. The valuation technique (discounted cash flow, market comparable) is acceptable as long as every significant input is observable.

Level 3 Inputs: Unobservable — Your Own Assumptions

Level 3 inputs are used when observable market data is not available or not sufficient. You are now building a model using your best estimate of what market participants would assume. This is the most subjective — and most scrutinised — level.

• Equity shares of an unlisted private company valued using a discounted cash flow (DCF) model with projected revenue growth rates and a terminal growth rate.
• Embedded derivatives in long-term contracts where no comparable instrument trades in the market.
• Biological assets (a mango orchard, a dairy herd) in regions with no active commodity market for that specific asset.

Level 3 does not mean you can use any number you like. You must still reflect what a hypothetical market participant would pay — your entity-specific synergies or cost savings that no other buyer would enjoy must be excluded.

Worked Example: Valuing an Unlisted Equity Investment (Level 3)

Your company holds a 15% stake in an unlisted logistics startup. There is no recent funding round, no comparable listed peer with identical operations. You must use a DCF model — Level 3.

Terminal Value calculation: Year 3 FCF × (1 + g) ÷ (WACC − g) = ₹47,00,000 × 1.05 ÷ (0.18 − 0.05) = ₹3,61,53,846 discounted at 0.609 = ₹2,20,07,692. Your 15% stake fair value = 15% × ₹3,01,39,392 = ₹45,20,909. This figure goes into your balance sheet, and you must disclose the 18% discount rate, the 5% terminal growth rate, and the sensitivity of the valuation to changes in those assumptions.

Disclosure Requirements by Level

The higher the level number, the more you must disclose. Level 3 disclosures are the most demanding — Ind AS 113 requires a reconciliation of opening to closing balances, gains and losses recognised, and a sensitivity analysis showing how the fair value changes if key unobservable inputs change by a reasonable amount. For complex portfolios, getting this right requires careful documentation throughout the year, not just at year-end. The Ind AS Adjustments tool on KyaTax can help you track and document these movements systematically.

Common Mistakes Companies Make Under Ind AS 113

1. Applying a blockage discount to Level 1 assets. If you hold a large block of a listed share, you may think the sheer size would depress the price on sale. Ind AS 113 explicitly prohibits blockage discounts at Level 1. Use the unit price, multiply by quantity.
2. Classifying a Level 2 asset as Level 1 to avoid detailed disclosure. Just because a bond is listed on BSE does not mean it qualifies as Level 1. If trading is infrequent or the market is not active, it drops to Level 2 and requires observable input-based valuation.
3. Using entity-specific cash flows in a Level 3 DCF. Your projected revenues must reflect what a typical market participant would achieve — not your unique customer relationships or proprietary efficiencies that a buyer would not inherit.
4. Ignoring the principal market concept. Ind AS 113 requires you to measure fair value from the perspective of the principal market (highest volume and activity), not the most advantageous market (best price). If your main market for a commodity is MCX, you use MCX prices — not an occasional private deal where you got a better rate.
5. Skipping the sensitivity disclosure for Level 3. Many companies prepare the valuation but forget to include the qualitative and quantitative sensitivity analysis. This is a specific requirement and a common audit finding.

Frequently asked questions

What is the difference between fair value and book value under Ind AS?

Book value is the historical cost of an asset minus accumulated depreciation, as recorded in your accounts. Fair value under Ind AS 113 is the price a willing buyer would pay a willing seller on the measurement date — it reflects current market conditions, not what you originally paid. The two can be very different, especially for property or old investments.

Does Ind AS 113 apply to small and medium companies in India?

Ind AS 113 applies to all companies that are required to follow Indian Accounting Standards — broadly, listed companies and unlisted companies above the applicability thresholds set by MCA. Companies still following AS (Accounting Standards) under the Companies (Accounting Standards) Rules use different guidance and are not directly subject to Ind AS 113.

Can I always use a DCF model for fair value measurement?

You can use a DCF model, but only when it reflects market participant assumptions and uses observable inputs wherever available. If market prices or comparable transaction data exist, you should incorporate them. A DCF based entirely on your own management projections without any market corroboration will almost certainly be classified as Level 3 and will face intense auditor scrutiny.

How often do I need to measure and disclose fair value under Ind AS 113?

Fair value must be measured at each reporting date for assets and liabilities carried at fair value on a recurring basis (such as investments measured at FVTPL or FVOCI). For non-recurring measurements — like fair value at the acquisition date in a business combination — you measure once at the trigger event. Disclosures are required in every set of financial statements where a fair value measurement is included.

General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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