Fair Value Accounting
Fair value or fair price is a concept that is used in economics and accounting. It is the amount at which the assets could be brought or sold when a transaction occurs between the agreeable and knowledgeable parties. This fair value is sometimes also used for liability, value of liability is the amount at which the particular liability could be incurred or settled between the willing parties. The basis for measurement should be a quoted market price in an active market which is the evidence for fair value. But the market price is not known in various circumstances so it is difficult to make estimates of fair value.
There are various methods of determining the fair value. But some methods are preferred to others as they are more accurate.
- If the transactions in the market are identical, the assets and liabilities should be valued with reference to such transactions.
- If there are no identical transactions but similar transactions are present in such a case fair value should be estimated by making the necessary adjustments and by using some assumptions that are market based.
- If both the above methods cannot be used, other valuation methods may be used that allows marketing to model.
Today’s market is dynamic and volatile. The FASB, after some extensive discussions have concluded that fair value is the most relevant measure for financial instruments. This model is more transparent than any other cost based measurement model. Fair value accounting is the technique where assets are assigned values. For the purpose of valuation sometimes the exclusion of goodwill makes it less significant for various investors. There are various intangible assets like goodwill. After the recognition of goodwill, it is tested for impairment annually. The methods used for assigning the values to intangible assets are categorized into market and income method.
Written by: Matt
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Tagged as active market, assets and liabilities, assumptions, circumstances, estimates, fair value accounting, fasb, financial instruments, goodwill, intangible assets, investors, measurement model, necessary adjustments, relevant measure, s market, valuation methods, willing parties + Categorized as Economy articles, Finance