Question

What is the difference between Fair market value and fair value? In what kind of situations would you use them? Be specific.

Answer 1

Difference between Fair Market Value and Fair Value -

Some people use fair value and fair market value as a same thing but there is difference between the two terms.

"Fair Value" is the price at which asset is exchange between knowledgeable parties at arm's length transaction.

"Fair Market Value" is the price an asset would sell for on the open market when certain conditions are met. The conditions are the parties involved are aware of all the facts are acting in their own interest, are free of any pressure to buy or sell and have ample time to make the decision.

The common difference between these two terms are • Fair value refers to the actual worth of asset, which is derived fundamentally and is not determined by the factors of any market forces.

While fair market value is solely determined by the factors of the demand and supply, and it is the value which determined by the fundamental of ab asset.

• Fair value of an assets often remain same, and it does not fluctuate more frequently when compared to market value.

On the other hand, in the fair market value as it is determined by the supply and the demand forces often tends to fluctuate.

• Fair value is most commonly used in market instead of any other valuation method. As in fair value, there is accuracy of the valuation of the asset.

While, market value is not most common valuation method which is used by companies due to it's shortcomings and limitations.

The situations where fair value and fair market value are used -

Fair value:

Fair value frequently used when undertaking due diligence in corporate transactions, where particular synergies between two parties may mean that the price that is fair between them is higher than the price that might be obtainable on the wider market.

Fair value is important when valuing asset on financial statement. It also apply to value of a stock or security in the open market.

Fair market value:

Tax setting and real estate market are two areas that commonly use fair market value. For example -Municipal property taxes are often assed based on the fair market value of the owner's property.

Insurance companies use fair market value in determining certain claim payouts.