Page 3 - 26. COMPILER QB - IND AS 113

a) A use that is physically possible takes into account the physical characteristics of the asset that market
participants would take into account when pricing the asset (e.g. the location or size of a property).
b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that

market participants would take into account when pricing the asset (e.g. the zoning regulations applicable
to a property).
c) A use that is financially feasible takes into account whether a use of the asset that is physically possible
and legally permissible generates adequate income or cash flows (taking into account the costs of
converting the asset to that use) to produce an investment return that market participants would require

from an investment in that asset put to that use.
Highest and best use is determined from the perspective of market participants, even if the entity intends a
different use. However, an entity’s current use of a non-financial asset is presumed to be its highest and best
use unless market or other factors suggest that a different use by market participants would maximise the
value of the asset.

To protect its competitive position, or for other reasons, an entity may intend not to use an acquired non-
financial asset actively or it may intend not to use the asset according to its highest and best use.
Nevertheless, the entity shall measure the fair value of a non-financial asset assuming its highest and best
use market participants.
In the given case, the highest best possible use of the land is to develop a commercial complex. Although
developing a business complex is against the business objective of the entity, it does not affect the basis of

fair valuation as Ind AS 113 does not consider an entity specific restriction for measuring the fair value.
Also, its current use as a parking lot is not the highest best use as the land has the potential of being used
for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to a market participant

who is interested in developing a commercial complex.
ii) As per Ind AS 113, unobservable inputs shall be used to measure fair value to the extent that relevant
observable inputs are not available, thereby allowing for situations in which there is little, if any, market
activity for the asset or liability at the measurement date. The unobservable inputs shall reflect the
assumptions that market participants would use when pricing the asset or liability, including assumptions
about risk.

In the given case, DS Limited adopted a discounted cash flow method, commonly used technique to value
shares, to fair value the shares of the private company as there were no similar shares traded in the market.
Hence, it falls under Level 3 of the fair value hierarchy.
Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets.

b) Quoted prices for identical or similar assets or liabilities in markets that are not active.
c) inputs other than quoted prices that are observable for the asset or liability.
If an entity can access quoted price in active markets for identical assets or liabilities of similar companies
which can be used for fair valuation of the shares without any adjustment, at the measurement date, then it
will be considered as observable input and would be considered as Level 2 inputs.

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