Fair Value Measurement
FAIR VALUE MEASUREMENT
1. The meaning of fair value
Fair value is the price that would be received from the sell of an asset or will be paid to transfer a liability in an orderly transaction between the market participants and the measurement date [IFRS, 13 – A501]. However in accounting and economics, fair value is the rational and unbiased estimate of a possible market price of a good, service or an asset. Fair value takes into account many objectives and subjective factors such as:
Objective Factors
Supply and demand
Acquisitions
Distribution costs
Replacement costs
Cost of substitutes
Subjective Factors
Risks
Cost of capital
Returns of capital
FAS 157 defines fair value as “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.” This definition reflects an “exit value”, meaning a value that firms can take the specific item through an orderly transaction with market participants.
When the market price of an asset can not be determined, fair value is used as a certainty of the market value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties or transferred to an equivalent party. [GAAP]
In terms of future markets, fair value is the equilibrium price for a future contract. This means that fair value will be equal to the spot price of the contract taking into account compound interest.
In terms of consolidations, fair value is the estimated value of all assets and liabilities of an acquired company that will be used to consolidate the financial statements of both companies in question.
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2. The application of fair value measurement
Fair value measurement is for a particular asset or liability. [IFRS 13] For this reason, when measuring fir value an entity must take into account the characteristics of the asset or liability if the market participants would take those
1. The meaning of fair value
Fair value is the price that would be received from the sell of an asset or will be paid to transfer a liability in an orderly transaction between the market participants and the measurement date [IFRS, 13 – A501]. However in accounting and economics, fair value is the rational and unbiased estimate of a possible market price of a good, service or an asset. Fair value takes into account many objectives and subjective factors such as:
Objective Factors
Supply and demand
Acquisitions
Distribution costs
Replacement costs
Cost of substitutes
Subjective Factors
Risks
Cost of capital
Returns of capital
FAS 157 defines fair value as “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.” This definition reflects an “exit value”, meaning a value that firms can take the specific item through an orderly transaction with market participants.
When the market price of an asset can not be determined, fair value is used as a certainty of the market value. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties or transferred to an equivalent party. [GAAP]
In terms of future markets, fair value is the equilibrium price for a future contract. This means that fair value will be equal to the spot price of the contract taking into account compound interest.
In terms of consolidations, fair value is the estimated value of all assets and liabilities of an acquired company that will be used to consolidate the financial statements of both companies in question.
3
2. The application of fair value measurement
Fair value measurement is for a particular asset or liability. [IFRS 13] For this reason, when measuring fir value an entity must take into account the characteristics of the asset or liability if the market participants would take those