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In recent years, accounting rule makers have issued guidance that requires certain items on the balance sheet to be reported at \u201cfair value.\u201d Here are some answers to frequently asked questions about this standard of value and how it\u2019s measured.<\/p>\n
What is fair value?<\/strong><\/p>\n Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is \u201cthe price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date.\u201d The use of the term \u201cmarket participants\u201d refers to buyers and sellers in the item\u2019s principal market. This market is entity specific and may vary among companies.<\/p>\n Fair value estimates are used to report such assets as derivatives, nonpublic entity securities, certain long-lived assets, and acquired goodwill and other intangibles. These estimates specifically exclude entity-specific considerations, such as transaction costs and buyer-specific synergies.<\/p>\n Does fair value differ from fair market value?<\/strong><\/p>\n Although fair value is similar to fair market value, the terms aren\u2019t synonymous. The most common definition of fair market value is found in IRS Revenue Ruling\u00a059-60. The IRS defines fair market value as \u201c[T]he 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.\u201d<\/p>\n The Financial Accounting Standards Board (FASB) chose the term \u201cfair value\u201d to prevent companies from applying IRS regulations or guidance and U.S. Tax Court precedent when valuing assets and liabilities for financial reporting purposes. The use of this term also shouldn\u2019t be confused with its use in certain legal situations \u2014 for example, when valuing a business for a divorce or a shareholder buyout. Statutory definitions of fair value typically differ from the definition provided under GAAP.<\/p>\n How is fair value measured?<\/strong><\/p>\n The FASB recognizes three valuation approaches: cost, income and market. It also provides the following hierarchy for valuation inputs, listed in order from most important to least important:<\/p>\n Valuation specialists are often used to estimate fair value. But ultimately, management can\u2019t outsource responsibility<\/em> for fair value estimates. Management has an obligation to understand the valuator\u2019s assumptions, methods and models. It also must implement adequate internal controls over fair value measurements, impairment charges and disclosures.<\/p>\n How do auditors assess fair value measurements?<\/strong><\/p>\n External auditors evaluate accounting estimates as part of their standard audit procedures. They may inquire about the underlying assumptions (or inputs) that were used to make estimates to determine whether the inputs seem complete, accurate and relevant.<\/p>\n Whenever possible, auditors try to recreate management\u2019s estimate using the same assumptions (or their own). If an auditor\u2019s estimate differs substantially from what\u2019s reported on the financial statements, the auditor will ask management to explain the discrepancy. Don\u2019t be surprised if auditors ask questions related to fair value estimates or request additional documentation to support your conclusions in today\u2019s uncertain marketplace.<\/p>\n For more information <\/strong><\/p>\n Contact us about any additional questions you may have about fair value measurements. We can help ensure that you\u2019re meeting your financial reporting responsibilities.<\/p>\n \u00a9 2022<\/em><\/p>\n <\/body> In recent years, accounting rule makers have issued guidance that requires certain items on the balance sheet to be reported at \u201cfair value.\u201d Here are some answers to frequently asked questions about this standard of value and how it\u2019s measured. What is fair value? Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is \u201cthe […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15956","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15956","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15956"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15956\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15956"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15956"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15956"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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