Ind AS 113 provides a single framework for measuring fair value and the disclosures required about it, used across every other standard that calls for a fair value measurement — it doesn't itself decide WHEN fair value is required, that's specified elsewhere (Ind AS 109 for financial instruments, Ind AS 16's revaluation model, and others). Its central contribution is the three-level input hierarchy, which ranks fair value measurements by how observable and reliable their inputs are, with Level 3 — the least observable, most judgment-dependent — carrying the greatest audit scrutiny and the most extensive disclosure requirements.
The three-level hierarchy
| Level | Input type | Example |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets or liabilities, unadjusted | A listed equity share's closing market price on a stock exchange |
| Level 2 | Inputs other than Level 1 quoted prices that are observable, directly or indirectly | An unlisted bond valued using observable yield curves for similar instruments |
| Level 3 | Unobservable inputs — the entity's own assumptions about what market participants would use | A discounted cash flow valuation of a private company investment, using management's own growth and discount rate assumptions |
Classifying a measurement at Level 2 when a significant unobservable input (an illiquidity adjustment, an entity-specific risk premium with no market basis) actually drove the result is a misclassification — the hierarchy level is determined by the LOWEST level input that is significant to the overall measurement, not by whichever inputs happen to be more observable.
Why Level 3 measurements need the most audit work
- 01Evaluate the valuation technique chosenIs it appropriate for this specific asset, and consistently applied period to period?
- 02Evaluate the reasonableness of the unobservable inputs themselvesGrowth rates, discount rates, illiquidity discounts — each needs independent challenge, since there's no external market price to check the result against.
- 03Consider using an auditor's own expertPer SA 620, where the complexity of the valuation technique or the degree of judgment involved is beyond what the engagement team can evaluate unaided.
- 04Check the required disclosures are completeInd AS 113 requires specific disclosure of the valuation technique, the significant unobservable inputs used, and a sensitivity analysis showing the effect of reasonably possible alternative assumptions — not just the resulting fair value figure on its own.
How we think about this
The hierarchy exists to make the reliability of a fair value number visible to a reader, not to hide a judgment-heavy Level 3 estimate inside the same presentation as a Level 1 quoted market price. Reviewing a fair value disclosure means checking that the level assigned actually reflects the inputs used, not just that a number exists and a level is stated next to it.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Revenue, receivables & cut-offInd AS 109: financial instruments and the expected credit loss modelThe old model waited for a loss to be incurred before providing for it. ECL is built the opposite way — provide for the loss you expect, before it happens.
- Fixed assets & capexInd AS 40: investment property, and why it's classified by purpose, not by typeThe same physical building can be investment property or ordinary PPE depending entirely on why the company holds it — the classification question is purpose, not bricks.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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