Confusion About Fair Values
EXECUTIVE SUMMARY
Use of fair market value (FMV) standard of value in current valuation practices causes confusion and results in additional unnecessary work. Most of the confusion in the application of FMV concept comes from the lack of cohesive, widely accepted guidance in how the concept should apply. Accounting and valuation professionals started to use fair market value at least from 1959 when the Treasury Department issued Revenue Ruling 59-60, clarifying certain valuation practices relevant to valuing the stock of closely held corporations. Fair value (FV) concept is notably more recent. It dates back to September 15, 2006, when FASB issued SFAS No. 157 – Fair Value Measurements (subsequently codified in ASC 820). FASB’s guidance on fair value addresses a number of valuation questions related to valuation of financial assets and liabilities. Guidance provided in current ASC 820, additional literature published on this topic provide a more comprehensive and easier to navigate source of knowledge as compared to information about application of fair market value concept.
ASC 820 defines and regulates the application of various additional characteristics of values represented by premises of value. FMV comes with diverse practices in determination and application of various premises of value. It’s up to the valuation specialist to determine and apply the appropriate premise.
We believe that given a more modern and comprehensive guidance provided in ASC 820, fair value serves as a notably more robust concept as compared to fair market value. Valuation community should try to more widely adopt fair value concept. This effort should be supported by legislative changes impacting application of the tax law in the U.S.
More specifics included in FV concept come with additional issues. Some valuation professionals questioned FV concept of highest and best use and treatment of transaction costs. In our experience, given the extensive FV guidance and subsequent interpretations, certain seeming contradictions and issues in application of FV concept can be addressed, if not resolved.
