fair value

(noun)

Fair value, also called "fair price" (in a commonplace conflation of the two distinct concepts) is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset.

Related Terms

Examples of fair value in the following topics:

  • Assessing Fair Value

    • investment account (the new fair value) and the old fair value, are recorded in other comprehensive income.
    • The investment is reported at fair value on the balance sheet.
    • This is fair value on the purchase date.
    • account (the new fair value) and the old fair value, are recorded in net income.
    • The investment is reported at fair value on the balance sheet.

  • Accounting Methodologies: Amortized Cost, Fair Value, and Equity

    • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
    • Fair value, also called fair price, is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of goods, services, or assets, taking into account such objective factors as:
    • These securities are reported at fair value, with unrealized gains and losses included in earnings.
    • Fair value, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset.
    • Explain the difference between amortized cost, fair value and the equity method for reporting debt securities

  • Calculating Fair Value

    • Calculating fair value involves considering objective factors including acquisition, supply vs. demand, actual utility, and perceived value.
    • A three-level framework is used to determine an asset or liability's fair value:
    • Within this level, fair value is also estimated using a valuation technique.
    • Adjustments are debited (for gains in fair value) or credited (for losses) to a fair value adjustment account that will adjust the investment account balance to its fair value at the end of the reporting period.
    • Summarize how to calculate fair value for holdings of less than 20%

  • Fair Value Method

    • The ownership of less than 20% creates an investment position carried at fair market value in the investor's balance sheet.
    • In accounting, fair value (also knows as "fair market value") is used as a certainty of the market value of an asset (or liability) for which a market price cannot be determined (usually because there is no established market for the asset).
    • This is used for assets whose carrying value is based on mark-to-market valuations; for assets carried at historical cost, the fair value of the asset is not used.
    • Fair market value (FMV) is an estimate of the market value of a property.
    • Explain how the Fair Value Method is used to calculate the value of holding of less than 20%

  • Current Issues in Reporting and Disclosure

    • Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price, for similar assets and liabilities, or based on another objectively assessed "fair" value.
    • Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 157: Fair Value Measurement, which "defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. " This statement is effective for financial reporting fiscal periods commencing after November 15, 2007 and the interim periods applicable.
    • Under GAAP, there is only one measurement model for fair value (with limited exceptions).
    • Various IFRS standards use slightly varying wording to define fair value.
    • Only the fair-value method is currently U.S.

  • Reporting Fair Value

    • Stock investments of 20% or less are recorded at cost (considered its fair value) and reported as an asset on the balance sheet.
    • Fair value accounting, also known as mark-to-market accounting, can change values on the balance sheet as market conditions change.
    • As required by FAS 115, the value of an investment accounted for under the cost method should be adjusted to current fair value at the end of each accounting period, in cases where the fair value is readily determinable.
    • Changes in fair value are debited (for gains in fair value) or credited (for losses) to a fair value adjustment account reported on the balance sheet to adjust the investment account balance to its end of period fair value.
    • Explain how to record stock investments of less than 20% using Fair Value

  • Basic Components of Asset Valuation

    • Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value.
    • The general rule on non-cash exchanges is to value the non-cash asset received at its fair market value or the fair market value of what was given up, whichever is more clearly evident.
    • Neither amount may adequately represent the actual fair market value of either asset.
    • An old asset's book value is usually not a valid indication of the new asset's fair market value.
    • Differentiate between the absolute value, relative value, fair value and option pricing methods of valuing an asset

  • Goodwill Impairment

    • A software company has net assets valued at $1 million, but the company's overall value (including brand, customers, intellectual capital) is valued at $10 million.
    • In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable "prudent value" in a business.
    • Instead of deducting the value of goodwill annually over a period of maximal 40 years ( amortization ), companies are now required to determine the fair value of the reporting units, using the present value of future cash flow , and compare it to their carrying value (book value of assets + goodwill - liabilities. ).
    • If the fair value is less than carrying value (impaired), the goodwill value will need to be reduced so that the fair value is equal to carrying value.
    • If there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded.

  • Loss Restoration

    • Fixed asset values can be revised to reflect an increase or decrease in value; upward revisions can recover earlier impairment losses.
    • Under US GAAP, once an asset is impaired its value cannot be increased regardless of what its fair market value is; once the value of an asset is decreased, it stays at that value unless its market value declines again.
    • US GAAP does require that a business impair its assets if its fair market value decreases.
    • The asset account is debited (increased) for the increase in value or credited (decreased) for a decrease in value.
    • Only assets accounted for under the revaluation model can have their book value adjusted to market value.

  • Present Value of Payments

    • Bond valuation is the determination of the fair price of a bond.
    • As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.
    • The bond price can be summarized as the sum of the present value of the par value repaid at maturity and the present value of coupon payments.
    • The present value of coupon payments is the present value of an annuity of coupon payments.
    • Bond price is the present value of coupon payments and face value paid at maturity.