Use of fair market value standard in current valuation practices causes confusion and results in additional unnecessary valuation work. Most of the confusion about fair market value comes from the lack of cohesive guidance on 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 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. Careful review of fair value definition established much earlier appears to only cover valuation of assets (property). 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.

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 make an effort 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 fair value concept come with additional issues. Some valuation professionals questioned fair value concept of highest and best use and treatment of transaction costs. In our experience, given the extensive fair value guidance and subsequent interpretations, certain seeming contradictions and issues in application of fair value concept can be addressed, if not resolved.

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