Question

Using PwC’s Global Guide to Fair Value Measurements, look for the discussion of market participants, in the context of understanding broad fair value concepts. What is the role of market participants in measuring fair value, and is it necessary for an entity to identify specific market participants when forming fair value assumptions?

Answer 1

The amount that would be received from sale of a non-current asset or the amount to be paid to settle a non-current liability by market participants in orderly transactions can be defined as the fair value. Thus, it is clear that the fair value is determined by taking into consideration the financial transactions effected by market participants under free and fair trade conditions. Thus, the role of the market participants is most important as the determination of fair value would be based on the orderly transactions between market participants. The fair value would be determined by the market participants talking into consideration the demand and supply of a particular asset or liability.   

Yes, it is important for an entity to identify the specific market participants while forming fair value assumptions. It is because the assumptions would have to be practical. The assumptions will only be practical and realistic if the assumptions are made keeping in mind the specific market participants.