What Is Fair Value
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THE DEFINITION OF FAIR VALUE
What is Fair Value?
The definition of fair value per AASB 13 Fair Value Measurement below incorporates a number of concepts.
Figure 1: Definition of Fair Value
Exit price
This is the price that would be received if the entity sold the asset.
Orderly transaction
A transaction is orderly if it allows sufficient time for the usual marketing activities for the asset. Therefore, orderly transactions do not include those transactions that are forced, such as liquidations.
Market participants
Fair value measurements are based on transactions that occur between market participants who are:
independent of each other;
knowledgeable about the asset and the transaction; and
able and willing to enter into a transaction for the asset i.e. not being compelled to do so.
Measurement date
Fair value is
based on a market participant’s expectations
an exit price
based on transactions that allow the customary time to sell an asset
determined at the measurement date
adjusted for the condition and location of the asset (where the asset would need to be moved to the market)
adjusted for restrictions on the sale and/or use of an asset that would apply to market participants
based in the market with the greatest volume or level of activity for an asset, where one exists*
based on the use of the asset by a market participant that would maximise the value of the asset or the group of assets and liabilities within which the asset would be used (non-financial assets)
generally the more relevant measure even if it involves estimates and judgements
Fair value is not…
based on the entity’s expectations
necessarily the cost to the entity to replace the asset
based on transactions that are rushed
determined at times convenient to the entity
measured ignoring the condition and location of the asset
adjusted