1. The estimated value of all assets and liabilities of an acquired company that is used to consolidate the financial statements of both an acquiring company and newly acquired subsidiaries. This is commonly referred to as fair value accounting in consolidation. In this treatment, fair value financial statements present the relevant parent company and its newly acquired subsidiary as a single company. These combined financial statements are only generated after the fair market value for the subsidiary is calculated. Fair market value and fair value accounting are two distinct concepts.
2. As per the International Accounting Standards Board, fair value in accounting is used to determine the price associated with either transferring a liability or selling an asset in an “orderly” transaction (in which there is no pressure to sell) on a specific date. This concept is most relevant when applied to financial statements over time.
3. Fair value itself is a term used to refer to a final (and legally obtained) sale price agreed upon by a seller and a buyer. In addition to sales of products and services, fair value may also apply to the price of an investment as determined by the market conditions upon which any given security is traded. Ideally, these prices are set in an active market, as this scenario offers the clearest outlook of what an investment is most accurately worth.
Little Boy: “You haven’t paid me enough for this cup of lemonade.”
Customer: “But it says “25 cents” on your sign.”
Little Boy: “Yes, but today’s active market has allowed me to reexamine the fair value accounting of my product. I’m going to need you to fork over another nickel.”