Fair value is one of the important concepts of finance. It is also known as fair price. This concept is equally important both for finance and economics. Through the fair value concept, one can have a clear idea about the would-be price of different commodities, properties and various services.
In other words, fair value can also be termed as a definite amount of the related asset or commodity at which the same could be purchased or exchanged in any transaction that is taking place at present time. For providing the present value of all the above-mentioned things, several factors are considered seriously by the fair value concept.
Some of these factors are the cost of production, cost of distribution, related risk factors, the subjective value of the same, the replacement charge and many more.Fair value is also very essential for accounting. The fair value is consulted to decide adequate market value of a certain commodity or a particular property.
The fair value is used in case of those things that have no active market. The values of these types of assets depend on a particular type of estimate known as mark-to-market process.
The market price and the fair value are related to each other. In a market, that is lucid enough, the fair value price and the market price of a particular commodity remain almost same. But at the same time, if there is lack of information about the factors necessary to bring out the fair vale, the value is going to differ from the market price.
A set of guidelines related to the accounting of fair value was introduced in 2004 by the Financial Accounting Standard Board. These guidelines are very important for the tabulation of several financial reports. By following these guidelines, the market fair value of properties as well as of liabilities can be estimated quite easily. Earlier, there was no guideline regarding the calculation of fair values and because of this, a number of inconsistencies were found in the process.
Last Updated on : 1st July 2013