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Fair value has three different meanings depending on the context.

In the investing world, fair value is the value an individual investor assigns to a company’s marketable securities based on his or her analysis of a company’s financial information. The investor then compares that value to the current market price.  Based on this comparison, the investor decides if the security is over or under priced and then makes a decision accordingly.  Brokerage companies also use their assessment of fair value when making buy, hold and sell recommendations for marketable securities.

In economics, fair value represents the potential price of a good or service and is a close approximation of the value set by a perfect market. Consideration is given to supply and demand effects on price, competitive goods or services, and the utility users receive from the good or service. Fair value and market value are often used interchangeably, but due to imperfect market dynamics, market value doesn’t always equal fair value. 

In accounting, fair value is used for assets and liabilities that must be listed on the books in a mark-to-market valuation.  According to the Financial Accounting Standard Board, “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.”  It assumes the market participants have time to evaluate the asset or liability, thus excluding situations like a liquidation sale.

 

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