Business Valuation in Financial Reporting – Webinar Excerpt

Differences between Fair Value and Fair Market Value Appraisals

Valuations performed for financial reporting purposes use Fair Value (as defined by the FASB) as the standard of value.  The FASB defines Fair Value as:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 (emphasis added)

Valuations performed for purposes other than financial reporting commonly use Fair Market Value as established by the Internal Revenue Service as the standard of value.  The IRS defines Fair Market Value as:

The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Rev. Rul. 59-60

Fair Value Measurement Process

Objective:  to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (ASC 820-10-55-1).  This requires determination of the following:

a.The particular asset or liability subject to measurement

b.For non-financial assets, the valuation premise that is most appropriate for that asset (its best and highest use)

c.The principal (or most advantageous) market to transfer the asset or liability

d.The most appropriate valuation technique(s) considering the availability of data with which to develop inputs that represent the assumptions that market participants would use to establish the price, taking into consideration the hierarchy of fair value inputs (Level 1, 2 or 3)  Business Valuation in Financial Reporting

ASC 820 defines the process and requires consideration of key issues but leaves a great deal of latitude to the appraiser.