Define Fair Value?

Fair Value is an accounting term that was first defined by the Securities and Exchange Commission (SEC). The Fair Value of an asset, according to GAAP, is the price at which it might be bought or sold in a current transaction between interested parties, excluding a liquidation. The Fair Value of an obligation, on the other hand, is the amount that the responsibility might be incurred or paid in a current transaction between willing parties, other than in a liquidation.

A stated market price in an active market, if available, is the greatest evidence of Fair Value and should be utilized as the measurement’s foundation. Preparers should estimate Fair Value using the best information available in the circumstances if a reported market price is not available. Quoted market values are often unavailable in many situations. As a result, estimating Fair Value is frequently challenging.

Fair value accounting is a method of taking market value of assets and liabilities as on the balance sheet date for considering changes in the value of assets and liabilities over a period of time and to re-calculate it periodically. It is more likely to be applied to financial assets and liabilities.

Fair value for assets or liability on the date of balance sheet will be the value for which assets or liabilities can be exchanged in the market.

For instance, in terms of international accounting standard (IAS) 16, property plant and equipment (or fixed assets), after initial recognition, may be carried at cost or fair value. if carried at fair value, then the changes in it are required to be reported and recognized at ‘other comprehensive income’ or ‘profit and loss’ as the case may be.