What is Fair Value? Definition.
Fair Value is an accounting term, originally defined by the SEC.
Under GAAP, the fair value of an asset is the amount at which that
asset could be bought or sold in a current transaction between
willing parties, other than in a liquidation. On the other side of
the balance sheet, the fair value of a liability is the amount at
which that liability could be incurred or settled in a current
transaction between willing parties, other than in a liquidation.
If available, a quoted market price in an active market is the best
evidence of fair value and should be used as the basis for the
measurement. If a quoted market price is not available, preparers
should make an estimate of fair value using the best information
available in the circumstances. In many circumstances, quoted market
prices are unavailable. As a result, difficulties occur when making
estimates of fair value.
Why Fair Value accounting? Relevance.
In today's dynamic and volatile markets, whether it is to buy or
sell, what people want to know is what an asset is worth today.
Accounting research supports that assertion. The FASB, after
extensive discussions, has concluded that fair value is the most
relevant measure for financial instruments. In its deliberations of
Statement 133, the FASB revisited that issue and again renewed its
commitment to eventually measuring all financial instruments at fair
value.
Fair value accounting provides more transparency than historical
cost based measurements. Maybe, if companies in the United States
and Asia had measured all financial instruments at fair value,
regulators, depositors, and investors could have achieved greater
regulatory and market discipline and avoided some of the losses that
investors and taxpayers have had to pay during previous downturns in
the economy.
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