Fair Value

Intermediate

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Fair value aims to show what something is worth today, rather than what was paid for it in the past. Accounting standards such as IFRS and US GAAP use this definition for many financial assets and liabilities, and allow it for some other assets, such as investment property under IFRS.

Fair value is measured using the best available evidence, grouped into three levels. Level 1 uses quoted prices for identical assets in active markets, such as a share price on a stock exchange. Level 2 uses other observable information, such as prices of similar assets or market interest rates. Level 3 relies on the company's own models and assumptions, used when market data are not available.

For example, shares a company holds in another listed company are usually valued at the current market price, so if that price rises from 20 to 25, the value in the accounts rises too.

Fair value can be more relevant than historical cost, but it can also be more volatile and, at Level 3, more subjective. Investors therefore pay attention to how fair values are measured and disclosed.

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