FAIR VALUE

Fair Value Measurement

Fair Value Measurement

Introduction

Fair value measurement is a very important concept in both economics and accounting. The potential price of a product, service or an asset is termed as fair value. This value is essentially based on an unbiased estimate. The fair value is calculated taking into consideration factors like the cost of an alternative product, service or asset, the value derived from the product, service or asset in the form of utility, the supply and demand match for it, the intensity and characteristic of risks, and the utility of the product as perceived by an individual.

Although, impartial measurement can take place for assets, liabilities and equities, the paper focuses only on the asset side of fair value measurement (CL78, 2009, Pp. 2-12). In this context, it is also imperative to state that fair value is not always the most accurate measure that is used for valuation. It all depends on the situation in which it is being used. The principles of fair value measurement that are given in the exposure document (ED/2009/5) govern IFRS in the measurement of fair value and its disclosure. The paper develops an understanding of the exposure draft (ED/2009/5) and the fair value measurement concepts in the light of the questions presented (IFRS, 2012).

• Briefly explain the fair value measurement principles required under the exposure draft (ED/2009/5) with apposite examples.

One of the most important documents that relates to fair value measurement is the Exposure Draft ED/2009/5. According to the exposure draft, the fair value is defined as the agreed price in the market transaction to pay a liability or to sell an asset, at the specific date or maturity between the market participants.

Aspects of Face Value Measurement

Asset

Asset might be alone or in the group, and the fair value measurement depends on the unit of account prescribed by IFRS. Hence, the characteristics or specifications of the asset become very important. For instance, the condition of the asset as well as the location of the asset is very important.

Transaction

Fair value measurement typically assumes the orderly transaction in the market. The aim is to hedging the forced transaction risk. In addition, the transaction is said to take place in the most advantageous market. It is the market which offers the highest amount which will be received against the asset.

The Price

The price of the asset on the date of the measurement is very important as it will be influencing it very highly irrespective of the inputs and valuation technique (CL78, 2009, Pp. 2-12).

Highest and Best Use

Another important point which must be noted when measuring the fair value is the highest and best use of the asset from the point of view of the market participants. For instance, if a restaurant is buying a boiler, it should be in realistic conditions and should help the restaurant in meeting its demand. The boiler should serve the purpose for which it was bought and should satisfy the product ...