fair market value

(noun)

The price at which the buyer and seller are willing to do business.

Related Terms

Examples of fair market value in the following topics:

  • 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.
    • Since market transactions are often not observable for assets such as privately held businesses and most personal and real property, fair value must be estimated.
    • Fair market value (FMV) is an estimate of the market value of a property.

  • 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.
    • Sometimes, neither of the items exchanged has a clearly determinable fair market value.
    • An old asset's book value is usually not a valid indication of the new asset's fair market value.

  • Assessing Fair Value

    • Companies must calculate the fair market value for these available for sale securities at the end of each subsequent accounting period.
    • While holding onto the securities the company must calculate the fair market value for these securities at the end of each subsequent accounting period.
    • The difference between the purchase price and the current fair market value results in an unrealized gain or loss.
    • At the end of each reporting period, the investments are revalued to fair value (market
    • Explain why a company calculates the fair market value of available for sale securities

  • 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.
    • Under International Financial Reporting Standards, once a fixed asset has been revalued its book value can be adjusted periodically to market value using the cost model or the revaluation model.
    • Only assets accounted for under the revaluation model can have their book value adjusted to market value.

  • Accounting Methodologies: 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.
    • The ownership of less than 20% creates an investment position carried at historic book or fair market value (if available for sale or held for trading) in the investor's balance sheet.
    • 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

  • 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.
    • Mark-to-market accounting can change values on the balance sheet as market conditions change.
    • Various IFRS standards use slightly varying wording to define fair value.
    • It provides that qualified security dealers who elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year.
    • Only the fair-value method is currently U.S.

  • Reporting Equity Investments

    • The market price of the stock is USD 1.
    • DR - Investment in XYZ Corporation USD 80,000 (80,000 shares * USD 1 market price/share)
    • The component that can give rise to goodwill is: the difference between the fair market value of the underlying assets and their book value .
    • To test goodwill for impairment, 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 plus goodwill minus liabilities).
    • If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so that the fair value is equal to the carrying value.

  • Calculating Fair Value

    • In accounting, fair value is used as an approximation 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).
    • When an active market does not exist other methods have to be used to estimate the fair value.
    • Assumptions used to estimate fair value should be from the perspective of an unrelated market participant.
    • 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 value is defined as a rational and unbiased estimate of the potential market price of a good, service, or asset.

  • 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

  • Lower of Cost or Market

    • In lower of cost or market (LCM), inventory items are written down to market value when the market value is less than the cost of the items.
    • The criterion for reporting this is the current market value.
    • Under LCM, inventory items are written down to market value when the market value is less than the cost of the items.
    • The company then values each class at lower its cost or market amount.
    • Explain how a would use the Lower of Cost or Market to value inventory