Definition of Fair Value
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 under current market conditions.
Usage
Fair value calculation is crucial in insurance and finance for accounting accuracy and compliance with regulations such as International Financial Reporting Standards (IFRS).
Measurement Basis
- Active Market Prices: If available, these should always be used first. Quoted market prices offer the most reliable basis for determining fair value.
- There isn’t always a clear market price then the market participants may turn valuation models, incorporating assumptions about the future cash flows and discounted rates.
External References
- [International Financial Reporting Standard (IFRS) 13, Fair Value Measurement](be used for further exploration into global standards for fair value accounting.): [ https://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/link2. [US Financial Accounting Standards Board ASC Topic 820, Fair Value Measurement](https://www.fasb.org/: Specific guidance regarding fair value measurements) etails for specific application guidance.
