Fair Value vs Market Value
There are many methods that a company can use to value their assets. Companies conduct frequent analysis on the value of the assets that the business holds, in order to ascertain the total value of the business, and to see how much the business could earn in the event that an asset is disposed. Two popular methods used to value assets are market value and fair value. The article offers a comprehensive explanation of the two methods used to value assets and explains how these methods are similar and different to one another.
What is Market Value?
Market value is the price that the asset could be bought or sold for in an open market. This, however, does not mean that the market value is the same price for which the asset was bought since the price would have fluctuated with market conditions and may be worth more or less than the price that was paid when it was purchased. The market value of an asset will be determined by the supply and demand of that asset on the market. The market value of any asset is usually determined by professional appraisers, who take into consideration a number of important factors in deciding the market value. However, it must be noted that assets sold in different parts of the country may have varying market values and the value of the asset depends largely on its location.
What is Fair Value?
Fair value is the value of the asset that is derived using various financial models. Such models take into consideration financial and economic factors, to arrive at the asset’s intrinsic value. Most models follow a similar approach in which the asset’s fair value is determined by discounting expected future cash flows that may be earned from the asset. The fair value should also be a true representation of the value of the asset and that the value assigned is ‘fair’. The fair value is the price that a party wishing to purchase the asset will pay for it. This value could be higher or lower than the market value depending on how valuable it is to the party who is purchasing the asset.
What is the difference between Fair Value and Market Value?
Fair value and market value are measures that are frequently used when determining the value of an asset. Even though they may sound similar, the way in which either is calculated is quite different to one another. Market value is the value that an asset can be bought and sold for in a market place. The market value of an asset will be determined by the demand and supply for it. The fair value of an asset is calculated by using financial models that take into consideration the total of the present value of the future cash flows that can be generated from the asset. The fair value is not always equal to the market value, and could be higher or lower depending on how valuable the asset is to the purchaser.
Summary:
Fair Value vs Market Value
• Fair value and market value are measures that are frequently used when determining the value of an asset.
• Market value is the price that the asset could be bought or sold for in an open market.
• The market value of an asset will be determined by the demand and supply for it.
• Fair value is the value of the asset that is derived using various financial models. Such models take into consideration financial and economic factors, to arrive at the asset’s intrinsic value.
• The fair value is not always equal to the market value, and could be higher or lower depending on how valuable the asset is to the purchaser.