Often times you can hear someone mention “fair value” of this and that. With this “this and that” being an asset of any kind that could be measured in fair value, we’ll focus on the term itself.

The term fair value is used for assets which are measured not at cost or at depreciated value, but precisely at fair value. Fair value by definition is an estimate, an unbiased and rational estimate of a potential market price for the said asset. It does take into consideration the characteristics of the asset in the sense that it’s the price willing parties would buy-sell the asset with. More so the sale should be a regular sale and not something done under abnormal circumstances, i.e. a liquidation sale. 

As it happens, determining the fair value isn’t as easy as it may seem. If there are comparable transactions happening or have happened in similar market conditions, it’s a pretty good reflection on the fair value indeed. However, if there are no transactions, fair value should be found using other methods, i.e. cash flow plans etc.

In essence fair value is an idea that’s pretty easy to be grasped, it’s the value the asset in question is worth. Not only worth to the person owning it, but what others, third party, would see as its value.