fair value

Reviewed by Vishnava | Updated on Sep 24, 2021


Introduction to fair value

Fair value means an asset's sale price. This is agreed upon by a buyer and seller, only when it is obvious that both parties are knowledgeable and can also access the transaction freely.

For example, securities have a fair value that are picked out by the market where they are traded. In accounting, this term means the approximate worth of liabilities and assets on a company's books.

Understanding Fair Value

It means the possible price that is determined after looking at the supply, utility, demand, and the amount of competition for it. Although it indicates an open marketplace, it is not relatively equal to market value, which suggests the price of an asset in the market.

In the investment world, a simple way to determine a security's or asset's fair value is to list it in a publicly-traded marketplace, like a stock exchange. If shares of company ABC trade on an exchange, market makers present a bid and ask for those shares daily.

An investor can trade the stock at the bid price to the market maker and purchase the stock from the market maker at the asking price. Since investor demand for the stock mainly defines the bid and ask prices, the exchange is a secure method to determine a stock's fair value.

Advantages Of Fair Value

Accurate Valuation- A primary benefit of fair value accounting is that it presents accurate asset and liability valuation regularly to the users of the company's reported financial information.

True Income - Fair value accounting restricts a company's ability to manipulate its reported net income potentially. Sometimes management may deliberately arrange certain asset sales, such as losses or gains from the sales, to increase or even decrease net income as reported at its desired time.

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