Fair Value in Financial Reporting

This chapter explains the fair value standard and discusses the history of fair value in accounting literature, the use of the standard as it applies to valuations for financial reporting purposes, and an interpretation of how fair value differs from other standards of value, such as fair market value. The chapter focuses on fair value measurement in business combinations and asset impairment tests, since valuation practitioners frequently encounter valuations for these types of assignments. The chapter also discusses audit issues related to fair value measurement. Some valuators view the practical application of fair market value as a transaction-based approach whereas fair value is used to value an asset or group of assets within the context of a larger transaction (e.g., assets valued in a posttransaction allocation of purchase price). Fair market value is based on a value-in-exchange premise whereas the fair value of assets acquired and liabilities assumed, for example, is often based on a premise of value in-use. The current guidance under ASC 820, however, utilizes a valuation premise based on the highest and best use of the asset from the perspective of a market participant, which may be different from the reporting entity's intended use.