What is Fair Value? Definition.
Fair Value is an
accounting term, originally defined by the SEC.
Under
GAAP, the fair value of an asset
is the amount at which that asset could be bought or sold in a current
transaction between willing parties, other than in a liquidation. On the
other side of the balance sheet, the fair value of a liability
is the amount at which that liability could be incurred or settled in a
current transaction between willing parties, other than in a liquidation.
If available, a quoted market price in an active market is the best
evidence of fair value and should be used as the basis for the
measurement. If a quoted market price is not available, preparers should
make an estimate of fair value using the best information
available in the circumstances. In many circumstances, quoted market
prices are unavailable. As a result, difficulties occur when making
estimates of fair value.
Why Fair Value accounting? Relevance.
In today's dynamic and volatile markets, whether it is to buy or sell, what
people want to know is what an asset is worth today.
Accounting research supports that assertion. The
FASB, after extensive discussions, has
concluded that fair value is the most relevant measure for financial
instruments. In its deliberations of Statement 133, the FASB
revisited that issue and again renewed its commitment to eventually
measuring all financial instruments at fair value.
Fair value accounting provides more transparency than historical
cost based measurements. Maybe, if companies in the United States and Asia
had measured all financial instruments at fair value, regulators,
depositors, and investors could have achieved greater regulatory and market
discipline and avoided some of the losses that investors and taxpayers have
had to pay during previous downturns in the economy.
Compare also:
Economic Value Added |
EBITDA |
Earnings per Share |
FAQ: Accounting relevant for VBM? |
Economic Margin
More valuation methodologies
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