When the same asset or liability can be transacted in more than one market, Ind AS 113 does not allow an entity to simply choose the market with the highest quoted price or the best net proceeds. The sequence is stricter: identify the principal market first. Only if there is no principal market does the most advantageous market become the basis for the fair value measurement.
This distinction sits in the transaction and price requirements of the current ICAI text of Ind AS 113, Fair Value Measurement. ICAI's 2025-26 Ind AS Compendium provides the current compendium route for the notified Standards.
The principal market is determined by activity, not by the best price
Ind AS 113 defines the principal market as the market with the greatest volume and level of activity for the asset or liability. The test therefore looks to where the relevant market is deepest and most active, rather than where a seller can obtain the highest one-off price.
This has a direct consequence. If a principal market exists, the fair value measurement must represent the price in that market even when another accessible market appears more advantageous at the measurement date. An entity cannot bypass the principal market merely because a different venue would generate more net cash after costs.
The market assessment is made from the entity's perspective. Ind AS 113 requires the entity to have access to the principal or most advantageous market at the measurement date, and recognises that different entities can therefore have different relevant markets for the same asset or liability. Access matters; a theoretically attractive market that the entity cannot access is not the market on which its fair value measurement is based.
You do not have to prove that every possible market was searched
Ind AS 113 does not require an exhaustive search of every possible market. The entity must consider information that is reasonably available. In the absence of evidence to the contrary, the market in which the entity would normally enter into a transaction to sell the asset or transfer the liability is presumed to be the principal market or, if there is no principal market, the most advantageous market.
That presumption is useful but it is not a substitute for evidence where the facts point elsewhere. If an entity regularly transacts in one venue but reliable market data shows that another accessible venue has materially greater volume and activity for the relevant asset or liability, the market-selection analysis should address that evidence directly.
The most advantageous market is a fallback, not a competing choice
The most advantageous market is relevant only when there is no principal market. Ind AS 113 defines it as the market that maximises the amount that would be received to sell an asset, or minimises the amount that would be paid to transfer a liability, after taking transaction costs and transport costs into account.
This creates two different calculations that are easy to mix up. Transaction costs and transport costs can both matter when comparing markets to identify the most advantageous market. But once the market has been selected, they are not treated the same way in the fair value measurement itself.
Transaction costs help choose the market but do not reduce fair value
Ind AS 113 says that the price in the principal or most advantageous market is not adjusted for transaction costs. Transaction costs are specific to the transaction rather than a characteristic of the asset or liability. Brokerage, commissions or similar transaction-specific costs may therefore affect the comparison of net proceeds when the most advantageous market is being identified, but they are not deducted from the selected market price to arrive at fair value.
Transport costs are different where location is a characteristic of the asset. In that case, the selected market price is adjusted for the cost that would be incurred to transport the asset from its current location to that market. This distinction is especially relevant for commodities and other physical assets for which location affects the economics of the measurement.
Worked example: the higher net proceeds do not override a principal market
Assume an entity can access two markets for the same commodity at the measurement date. The following numbers are hypothetical and are used only to illustrate the Ind AS 113 sequence.
- Market A: quoted price ₹1,000, transaction costs ₹20 and transport costs ₹30. Market A has the greatest volume and level of activity.
- Market B: quoted price ₹1,040, transaction costs ₹10 and transport costs ₹20. Market B is less active.
Market A's net proceeds for a market-comparison calculation are ₹950, while Market B's are ₹1,010. Market B therefore looks economically better after both categories of cost. But if Market A is the principal market, Ind AS 113 requires Market A to be used. The fair value would be ₹970: the ₹1,000 market price less ₹30 transport cost. The ₹20 transaction cost is not deducted in measuring fair value.
Now assume there is no principal market and both markets are accessible. The entity would compare the markets on the most-advantageous-market basis. Market B would win because its net proceeds of ₹1,010 exceed Market A's ₹950. The fair value would then be ₹1,020: Market B's ₹1,040 price less ₹20 transport cost. The ₹10 transaction cost helped determine which market was most advantageous, but it is not a fair value adjustment.
Market selection and the fair value hierarchy answer different questions
A market-selection conclusion should not be confused with the Level 1, Level 2 and Level 3 fair value hierarchy. The principal-versus-most-advantageous analysis determines which market provides the relevant exit-price basis. The hierarchy determines how the inputs used in the resulting measurement are categorised.
For example, identifying an active exchange as the principal market may lead to an unadjusted quoted price for an identical item, but the hierarchy classification still depends on the specific requirements for the inputs used. Conversely, a principal market can exist even when the final price has to be estimated using a valuation technique rather than observed directly; Ind AS 113 expressly says the principal-market price may be directly observable or estimated using another valuation technique.
A practical year-end file should show how the market was chosen
For recurring fair value measurements, the market conclusion should be documented separately from the valuation model. A concise working paper can usually answer the key questions:
- Define the item being measured. Identify the asset or liability and the relevant unit of account before comparing markets.
- Identify accessible markets. Record which markets the entity can access at the measurement date and any restrictions that make a market unavailable to that entity.
- Gather activity evidence. Compare volume and level of activity using reasonably available market data. Do not substitute the entity's own historical trading volume for evidence about the market itself where broader market information is available.
- Conclude on the principal market first. If one accessible market has the greatest volume and level of activity, use that market even if another venue offers better net proceeds.
- Use the most advantageous test only if necessary. If no principal market exists, compare the amount received or paid after transaction and transport costs to identify the most advantageous accessible market.
- Separate market selection from the final price adjustment. Keep transaction costs in the market-comparison analysis but do not deduct them from fair value. Adjust for transport costs when location is a characteristic of the asset.
- Retain the evidence. Keep price sources, volume/activity data, access evidence, cost assumptions and the approval or review of the conclusion so the measurement can be reproduced and audited.
Common errors usually come from reversing the order of the tests
- Choosing the market with the highest quoted selling price before checking whether another market is the principal market.
- Comparing net proceeds across markets even though a principal market has already been identified.
- Using a market the entity cannot access at the measurement date.
- Deducting brokerage or other transaction costs from the final fair value figure.
- Ignoring transport costs where the asset's location is a characteristic relevant to market participants.
- Treating the fair value hierarchy as if it decides which market must be used.
The decision rule is therefore sequential. First ask whether an accessible principal market exists. If it does, use that market's exit-price basis. If it does not, identify the most advantageous accessible market using the required net comparison. Only after that market is selected should the entity determine the fair value price and apply the different treatment required for transaction costs and transport costs.
