Fair Value – Definition

Cite this article as:"Fair Value – Definition," in The Business Professor, updated July 30, 2019, last accessed August 5, 2020, https://thebusinessprofessor.com/lesson/fair-value-definition/.


Fair Value Definition

Fair value is a term that has a variety of meanings as used in accounting and economics generally. Fair value could mean the current or actual value of an asset, it could also mean the market price of a good in a transaction.

The value or sale price of an asset, a good or commodity, agreed upon by both the supplier and the purchaser is referred to fair value. However, in most transactions, the market in which the transaction is made determines the Fair value of the asset or commodity.

A Little More on What is Fair Value

Following that standards of the International Accounting Standards Board, the amount a buyer pays for an asset and the amount the vendor receives for the asset at a specified date formulate the fair value. This means that there is an existing agreement between both parties involved in the transaction.

In the investment market, a security that is traded on an exchange realizes a more accurate fair value than securities that are not traded on an exchange. When a security is listed on an exchange, it makes it easier for bid and ask prices to be placed on the stock, this will in turn create a fair value for the security of stock.

How Fair Value in Consolidation Works

In business, consolidation takes place when a merger or acquisition between a smaller and a bigger company occurs. When integration or consolidation occurs between two companies, their financial statements are also combined. Once this happens, the fair value of the subsidiary or acquired company is often used in generating the combined financial statement.

Also, in Consolidation, a smaller business is absorbed into a bigger business so also are their financial records. The smaller company becomes a subset or subsidiary of the body one. In a consolidation, the fair value for each company is taken into consideration.

Other Methods Used to Determine Fair Value

Generally, for fair value to be accurate and reliable, there must be an existence of an active market where trade can take place. For a security, being on an exchange is crucial. Aside from a security being listed on an exchange for the fair value to be accurately determined, there are other measures to determine fair value. These include; the use of discounted cash flow to determine the Fair value of an asset. If the discounted cash flow is being used, the amount of money that the assets generate during the period of time for which it was useful is calculated.

Fair Value in the Futures Market

The Fair value in future contracts is agreed upon by both the buyer and the seller. It is the fair price of a futures contract estimated after putting into consideration the dividends loss and compounded interest of a futures contract over a given length of time. The market also influence the fair value in futures contract to a great extent.

References for “Fair Value”

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