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Differentiate between fair value and market value
Fair value is used in the valuation of an asset and is the value at which an asset is exchanged between the parties. In other words, the fair value is the transaction amount paid between parties in the open market. It is also used in stock or share price.
Market value is the value of assets decided by market. Market value is calculated based on present market price or stock price. Market value depends on demand & supply and willingness of investors. Not always market price and fair value are the same.
Fair value of calculated based on
- Market price
- Comparable prices of similar assets
- Discounted cash flow method
Market value is not an appropriate method of calculating intrinsic value of an asset because market value depends on various factors and fluctuates at times. On other hand fair value calculates true intrinsic value of asset
Fair value of asset is always adjusted for impairment and same is arriving at true value of asset. On other hand market is determined by parties after meeting and negotiations and arrive to finial price which not logically driven
In most cases fair value is often fundamental valuation of assets. Fundamental value is the actual worth of an asset. Market value is always decided by the market and its forces. Market value is not always equal to fundamental value.
The major differences between fair value and market value are as follows −
|Sr.No||Fair value||Market value|
|1||Tells about the actual worth of the asset.||Determined by demand and supply.|
|2||Not determined by market forces.||Not determined by fundamentals of assets.|
|3||Most commonly used among valuation methods.||Not commonly used valuation method.|
|4||Fair value remains the same.||Market value fluctuates.|
|5||Globally accepted as per the International Financial Reporting Standards (IFRS) and General Accepted Accounting Principles (GAAP).||Not globally accepted.|
In valuation of industry fair value and market value plays a significant role. A firm values their asset through various methods and decides the value which is close to fit to sell.In no open market situation determining fair value is difficult and costly. Fair value method is considered as best practice in industry.
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