Fair value definition

Fair value is the price that two parties are willing to pay for an asset or liability, preferably in an active market. In this situation, the effects of supply and demand will likely impact the value associated with the asset under examination. A less accurate measure of fair value is when there is an active market for a similar item, while the least accurate measurement method is to use the discounted cash flows associated with the future performance of an item.

A liquidation sale is not considered to result in prices that adequately reflect fair value, since the transaction is too rushed to attract an adequate number of bidders.

The accounting rules related to fair value are noted in detail in Topic 820 (Fair Value Measurement) of the Accounting Standards Codification.

Related Courses

Fair Value Accounting