Valuation performed for an auditor is a different exercise from valuation performed for a deal
The subject can be identical, the date can be identical, and the answer can legitimately differ. A transaction valuation asks what this is worth to the parties in front of it. A financial reporting valuation asks what a hypothetical market participant would pay or receive at the measurement date, under a definition the accounting standard supplies, with the reasoning documented to a level an auditor can test. The commonest source of friction in an audit is a valuation prepared to the first standard being submitted against the second.
- The fair value definition, the three level hierarchy, and where an input actually sits
- Purchase price allocation after an acquisition, and the choices that are made once and never revisited
- Goodwill impairment, and two standard setting projects that are live right now
- Financial instruments that have no price, which is where most audit questions land
How this page relates to our accounting advisory pages. Exactitude International has separate material on IFRS and on US GAAP, which deals with the framework: which standard applies to you, what it requires, what has to be disclosed, and how a group reporting under one framework reconciles to another. This page deals with the valuation exercise those standards call for: how the number is actually built, which inputs are defensible, and what an auditor will test. If your question is which standard governs, start there. If your question is how the fair value is arrived at, you are in the right place.
An exit price, not a value to you
Fair value under IFRS 13 is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 uses the same definition.
Ind AS 113 is substantially converged with IFRS 13. Both adopt the same core measurement model: the exit price concept, market participant assumptions, the three level hierarchy, highest and best use for non-financial assets, and the unit of account. The differences set out in Ind AS 113's own comparison appendix are editorial or jurisdiction-specific rather than conceptual: Indian terminology such as balance sheet in place of statement of financial position, deletion of references that have no Indian equivalent, and omission of the IFRS transition and effective date paragraphs while keeping the paragraph numbering aligned.
Three consequences follow from the word "exit", and each of them regularly catches preparers out.
- It is not entity specific. What the asset is worth to you, given your plans, your tax position and your cost of capital, is not the question. The question is what a market participant would pay.
- It assumes a transaction that is not happening. Fair value is measured for assets nobody intends to sell. The absence of an intention to sell is not a reason the measurement cannot be made.
- Highest and best use applies to non-financial assets only, and is assessed from a market participant's perspective, limited to uses that are physically possible, legally permissible and financially feasible. A plot of land held for a factory may have to be measured on the basis of a use the entity has no intention of pursuing.
The hierarchy, and why classification is contested
| Level | What it is | Where the argument happens |
|---|---|---|
| 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | Whether the market is genuinely active, and whether the instrument is genuinely identical. Any adjustment to a quoted price drops the measurement out of level 1 |
| 2 | Inputs other than quoted prices that are observable, directly or indirectly | Whether a broker quote is observable, and whether a valuation built on observable inputs but a proprietary model stays in level 2 |
| 3 | Unobservable inputs | The disclosure burden. Level 3 brings sensitivity analysis and a reconciliation of movements, which is why classification is not a cosmetic question |
The classification is driven by the lowest level input that is significant to the measurement as a whole. One significant unobservable input pulls the entire measurement into level 3, however observable the rest of it is. Preparers routinely misclassify by categorising each input separately.
Unit of account matters as well: the level at which the item is aggregated or disaggregated for recognition is set by the standard requiring the measurement, not chosen by the valuer, and it determines whether you are measuring a single share, a block, or an entire reporting unit.
Purchase price allocation, and the decisions that cannot be revisited
When a business is acquired, the consideration transferred has to be allocated across the identifiable assets acquired and liabilities assumed, measured at fair value, with the residual recognised as goodwill. It is one of the few valuation exercises that sets the subsequent depreciation, amortisation and impairment profile of the acquirer for years, which is why doing it as an afterthought is expensive.
What comes out of goodwill, and what stays in
An intangible asset is recognised separately from goodwill if it meets either the separability criterion, meaning it can be sold, licensed, rented or exchanged, or the contractual or legal criterion, meaning it arises from contractual or legal rights. Meeting either one is enough.
Two things that feel like assets are deliberately not recognised. An assembled workforce is not separable and does not arise from a contractual right, so it stays inside goodwill, and it earns a contributory asset charge in the valuation of the intangibles that use it. Expected synergies are likewise subsumed into goodwill. Guide 5 works through the methods used to value what does come out.
Contingent consideration
An earn-out is measured at fair value on the acquisition date. If it is classified as a liability, it is remeasured at each reporting date with the movement going through profit or loss; if it is classified as equity, it is not remeasured. The classification is therefore worth settling at the drafting stage of the agreement rather than at the reporting stage, because it decides whether the acquirer's future earnings move every time the target outperforms.
Two choices made once
- Non-controlling interest. Under IFRS 3 and Ind AS 103 the acquirer chooses, transaction by transaction, whether to measure a non-controlling interest that carries present ownership and proportionate liquidation rights at fair value, which produces full goodwill, or at its proportionate share of identifiable net assets, which produces partial goodwill. The choice is made at initial recognition and is not available for other classes of non-controlling interest, which must be measured at fair value. US GAAP does not offer the equivalent election. Under ASC 805 the non-controlling interest is measured at acquisition-date fair value, so full goodwill is the only outcome. This is a real difference between the frameworks and a comparison table that reverses it is a common and consequential error for a group reporting under both.
- The measurement period. Provisional amounts may be adjusted retrospectively for a maximum of one year from the acquisition date, and only for new information about facts and circumstances that existed at that date. A change of view after the year, or a change based on later events, goes through profit or loss instead of restating goodwill.
Goodwill impairment, and two live projects worth watching
Goodwill is not amortised under IFRS, Ind AS or current US GAAP for public entities. It is tested for impairment, and the test is where the valuation work recurs every year.
Under IFRS and Ind AS
Goodwill is allocated to cash generating units, or groups of units, expected to benefit from the synergies of the combination, and each is tested at least annually by comparing carrying amount against recoverable amount, the higher of fair value less costs of disposal and value in use. The allocation of goodwill to units is made once and constrains every subsequent test, so a coarse allocation made quickly at acquisition can hide an impairment for years and then release it all at once.
Under US GAAP
Since the removal of the second step of the test, impairment is measured simply as the excess of a reporting unit's carrying amount over its fair value, limited to the goodwill balance. Private companies and not-for-profit entities may elect alternatives, including amortising goodwill over a period of up to ten years combined with testing only on a triggering event, and a related alternative allowing certain customer-related intangibles and non-compete agreements to be subsumed into goodwill rather than recognised separately.
The two projects
Both of these are worth knowing about precisely because a lot of commentary describes them as further along than they are.
- The IASB's project on business combination disclosures, goodwill and impairment has been in redeliberation since exposure draft ED/2024/1 in March 2024, with the Board still discussing feedback and refining the proposed disclosure package through its 2026 meetings. No final amendments to IFRS 3 or IAS 36 have been issued and no effective date has been announced. These are proposals, not requirements, and content asserting that the amendments are final is wrong.
- FASB added a new goodwill project on 29 July 2026. It is an agenda decision to explore targeted improvements: whether impairment should be tested at the operating segment level rather than the reporting unit level, and whether the annual testing requirement should give way to testing only on a triggering event. No exposure draft or Accounting Standards Update has been issued and ASC 350 is unchanged, so annual testing at reporting unit level continues to apply. The earlier project that considered reintroducing amortisation was removed from the agenda in June 2022 and has not been revived in that form.
On the Indian side the position is settled and worth stating plainly, because the absence of change is itself useful. The Companies (Indian Accounting Standards) amendment rules notified in 2025 and 2026 did not amend Ind AS 103, Ind AS 36 or Ind AS 113. The May 2025 rules dealt principally with Ind AS 21 and consequential changes to Ind AS 101 on lack of exchangeability; the August 2025 second amendment rules touched Ind AS 101, 107, 108, 109, 115, 1, 7, 12, 21, 28 and 32; and the August 2026 rules amended Ind AS 101, 107, 109, 110 and 7. The 2026 amendments to Ind AS 109 continue to cross-refer to the fair value definition in Ind AS 113, but a cross-reference is not an amendment. The core Indian requirements for business combinations, impairment and fair value measurement discussed on this page are unaffected.
Financial instruments that do not have a price
This is where the largest share of audit queries on fair value actually arise, because the instruments are individually small, numerous, and almost always level 2 or level 3.
Convertible instruments
A compulsorily convertible instrument, a convertible note with a discount and a cap, an instrument with a liquidation preference. Each has to be decomposed into what it actually is before it can be valued, and the equity component is usually valued with an option pricing framework rather than by discounting. The cap table treatment and the accounting treatment have to agree with each other, and frequently do not.
Derivatives and hedges
Forwards, swaps and options entered into for currency or interest rate management. Valuation is model based, the inputs are usually observable, and the recurring questions are about counterparty and own credit risk adjustments and whether the discount curve used is the one a market participant would use.
Debt instruments and guarantees
Related party loans on non-market terms, deeply subordinated debt, financial guarantees given to a subsidiary. The valuation turns on a credit spread that has to be built rather than observed, and the assumption that an intra-group loan carries the group's credit rating rather than the borrower's is a frequent finding.
Unquoted equity investments
A minority stake in a private company held by a corporate investor or a fund. Valuation is typically a calibrated market approach anchored to the most recent transaction price and updated for performance and market movement, rather than a fresh discounted cash flow each period. Funds have their own portfolio valuation requirements on top, as noted in Guide 1.
What an auditor is actually testing
In our experience the questions are consistent and are rarely about the arithmetic: is the model appropriate for the instrument, are the significant inputs supported by something outside the entity, has the classification in the hierarchy been applied to the measurement as a whole rather than input by input, and is the sensitivity disclosure consistent with the inputs actually used. A valuation file built to answer those four questions in advance turns an audit issue into an audit procedure.
Where to go next
1. Who Can Sign a Valuation Report in India, and When You Need One
The registered valuer regime, the three certifier lists that apply to the same transaction, and what changed between December 2025 and April 2026.
2. Valuation for Mergers, Acquisitions and Business Transfers
Share exchange ratios, business transfer pricing, open offer and delisting floor prices, and where control premium and marketability discount belong.
3. Valuation for Fundraising, Convertibles and ESOPs
Two separate pricing tests for a foreign-funded round, convertible instruments, the end of angel tax, employee stock options and sweat equity.
5. Valuing Intangible Assets, Brands and Intellectual Property
Separating an intangible from goodwill, the four methods that do most of the work, and the settings outside an acquisition where the question arises.
Valuation Services
Back to the main page: which valuation you need, who can sign it, and how an engagement is put together.
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Tell us what has been asked for and by whom: a purchase price allocation after a completed acquisition, an impairment test, a portfolio of instruments an auditor has queried, or a fair value disclosure you are not confident survives review. If there is a reporting deadline, say so. A partner replies within one business day.
This page is general information, not professional advice. Company law, exchange control, securities regulation, tax law and the accounting standards that sit behind a valuation all change frequently, and several of them changed materially in 2025 and 2026. How any of it applies depends on your own facts. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.