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Fair value: boon or curse
Pages 9 (2259 words)
Two terms used interchangeably in daily conversation: Value, and Price, one taken as a synonym for the other when spoken as layman's terms. But the connotations assume a sharp distinction when these terms are used in the context of finance. An asset may be valuable because it may have a potential to generate income, or it may have substantial intrinsic value; however, it may have a low market price because the buyer may be unaware of its true worth, or the seller was in dire need of money and was willing to sell at a huge discount…
A wise buyer will buy an asset at equal to or lower than its fair value, and a wise seller will sell at a price equal to or higher than fair value.
The distinctions become more pronounced if what came under consideration was accounting value, or the worth of an asset according to financial records and the workings of generally accepted accounting principles. Theoretically, price should equal value, but since market efficiency is seldom a reality, if ever, in a transaction, buyers and sellers can exploit price and value inconsistencies to their benefit.
The IASB definition of fair value has been described as "substantially similar" to the FASB revised definition, which are both consistent with the measurement objective. (IASB Fair Value Measurement). Under this definition, the fair value of an asset is the amount at which that asset could be bought or sold in a transaction between willing parties, other than in a liquidation. ...
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