Life May Not Be Fair — But Your Asset Valuation Should Be
- Fany Bortolin
- Sep 2
- 3 min read
If you’ve ever wondered how fair value differs from fair market value or intrinsic value, you’re not alone. These terms often get used interchangeably, but in accounting and financial reporting, they have distinct meanings — especially under US GAAP.
While it’s easy to determine fair value for publicly traded stocks and bonds, things get more complicated when assets don’t have an active market. That’s why US GAAP provides a standardized framework for fair value measurement.
In this guide, we’ll cover:
How US GAAP defines and measures fair value.
Key differences between fair value, fair market value, and intrinsic value.
The fair value measurement framework (valuation techniques and hierarchy).
Disclosure requirements and exceptions.
What Is Fair Value?
Under US GAAP, fair value is an exit price — the amount you would receive to sell an asset or transfer a liability at the measurement date under current market conditions.
To qualify as fair value, the transaction must:
Be orderly – not forced or distressed (e.g., not a bankruptcy fire sale).
Be between market participants – independent, knowledgeable, and willing parties acting in their best interest.
Take place in the principal market – the market with the greatest volume and activity for that asset or liability.
Reflect current conditions – at the specific measurement date.
In other words, fair value reflects the realistic selling price today under normal conditions.
Fair Value vs. Fair Market Value vs. Intrinsic Value
Fair Value (Accounting Term):
An exit price measured according to GAAP rules. Excludes transaction costs (though transportation costs may apply if location matters).
Fair Market Value (Tax & Legal Term):
The price a willing buyer and seller agree upon. Commonly used for estate, tax, or property valuations.
Intrinsic Value (Investment Term):
The “true” value of an asset based on fundamentals such as cash flows or growth potential, often used in equity research or valuation modeling.
Special Considerations for Liabilities and Equity
Liabilities: Fair value must reflect default (nonperformance) risk, often tied to credit ratings. The higher the risk, the higher the discount rate — reducing the liability’s fair value.
Equity Instruments: Measured at their market trading price if available (not at book value).
Most Advantageous Market
If no principal market exists, fair value can be determined using the most advantageous market — the one that maximizes the selling price of an asset or minimizes the cost of transferring a liability.
⚠️ Important: Transaction costs are used to determine the most advantageous market but are not included in the fair value itself.
Highest and Best Use (Non-Financial Assets)
For non-financial assets like land or property, fair value assumes the highest and best use — the most valuable use of the asset, regardless of how the current owner is using it.
Appraisals are often used to determine this.
The Fair Value Measurement Framework
US GAAP outlines a two-part framework:
1. Valuation Techniques
Market Approach: Uses prices from identical or comparable assets in active markets.
Income Approach: Discounts future cash flows to their present value.
Cost Approach: Based on the cost to replace the asset.
Companies are required to maximize observable inputs and minimize unobservable inputs when selecting a technique. Changing techniques is considered a change in estimate (prospective only).
2. Fair Value Hierarchy
Inputs are ranked by reliability:
Level 1: Quoted prices for identical assets in active markets (e.g., IBM stock).
Level 2: Observable but indirect or comparable inputs (e.g., similar bonds).
Level 3: Unobservable inputs, based on management assumptions (least reliable, highest risk of bias).
Disclosure Requirements
Companies must disclose in the footnotes:
Valuation techniques used.
Inputs and assumptions.
Uncertainty in measurements.
Sensitivity of fair value to changes in assumptions.
How changes affect performance and cash flows.
The goal is transparency for investors and stakeholders.
Example of Fair Value Measurement
Scenario: Company XYZ buys 1,000 shares of Company ABC at $10 each. At year-end, the shares trade at $12.
Technique: Market approach (quoted price).
Input: Level 1.
Adjustment: Unrealized gain of $2,000 ($12,000 – $10,000) recorded in income.
Exceptions to Fair Value Measurement
Not everything is measured at fair value under US GAAP. Exceptions include:
Property, Plant & Equipment (PPE): Measured at cost, not market (unlike IFRS, which allows fair value).
When fair value is impractical or unreliable to determine.
Certain items like leases, share-based compensation, or vendor-specific software value.
In these cases, the cost method is used instead.
Final Thoughts
Fair value is a cornerstone of modern financial reporting. By standardizing measurement, US GAAP ensures consistency, comparability, and transparency — giving investors and stakeholders confidence in financial statements.
The key takeaways:
Fair value = exit price under normal conditions.
Different from fair market or intrinsic value.
Measured using valuation techniques and a hierarchy of inputs.
Requires detailed disclosures to support decision-making.
As markets evolve, so do valuation complexities. But with GAAP’s framework, fair value provides a reliable foundation for reporting financial assets and liabilities.
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