We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are Fair Value Measurements?

By Osmand Vitez
Updated: May 17, 2024
Views: 4,358
Share

Fair value measurements represent a value placed on items that is indicative of their current value rather than historical cost. National accounting standards require the use of fair values for items such as financial instruments, impaired assets, and stock options,. The basic concept behind fair value measurements is that a seller should value an asset at the price it would receive when selling in an open market. Or, a company should value assets at the current replacement cost.

Many companies use the historical cost basis for recording assets. The value retained in the general ledger represents the original cost paid plus any freight charges or installation costs. The problem with this figure is the value is often higher than the asset’s current value. This can inflate the company’s balance sheet and make it look financially healthier than it would be using fair value measurements. National accounting standards often call an asset’s historical value the entry value method.

Three methods exist for making current value measurements on assets or liabilities. The first is to receive a quoted price for an identical asset or liability. The company must have access to the market, and the information must be in real dollars, not a theoretical price. A significant drawback to this method is that markets rarely exist for the assets used by companies. Open market prices are therefore difficult to obtain, especially when a caveat exists that a company must have access to the market.

The second measurements process allows a company to make some assumptions regarding the current value of its assets. The company can use a market where similar assets or liabilities are available for sale. The company can then estimate what its asset might sell for in this market. The market may be active or less active. For liabilities, companies may be able to estimate the future cash flows for each item and then compare this figure to the open market to determine a fair value.

A third fair value measurements process is necessary where no markets exist for the assets owned by a company. If no active or less active markets exist, it makes it impossible to obtain a real dollar figure for the asset or liability. In absence of this data, the company can use its own information and that probably used by other companies looking for a similar asset to gauge the fair value. This should be a rare occasion for companies as this scenario provides the least reliable fair value for assets and liabilities.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-are-fair-value-measurements.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.