What is the Difference Between Fair Value and Market Value?
🆚 Go to Comparative Table 🆚The main difference between fair value and market value lies in the factors they consider when determining the worth of an asset. Fair value is an estimate of an asset's worth based on factors like its potential for growth, cost to replace, and expected earnings. It is most often used in accounting and financial reporting contexts. Market value, on the other hand, is the observed and actual value for which an asset or liability is exchanged, determined by factors such as supply and demand in the market. It is typically used in valuing businesses and assets in the context of tax and legal matters. Here are some key differences between fair value and market value:
- Determinants: Fair value considers factors like an asset's growth potential, replacement cost, and expected earnings when determining its worth. Market value is determined by supply and demand in the market and other relevant factors.
- Purpose: Fair value is primarily used in accounting and financial reporting contexts, such as financial statements and risk management. Market value is used in various contexts, including tax and legal matters, and is often used to determine the overall value of a business as a going concern.
- Market Conditions: Fair value assumes that the transaction occurs in an open and unrestricted market, with both parties acting in their own best interests. Market value, however, is not solely determined by market conditions but also by the fundamental aspects of the asset.
- Control and Discounts: Fair market value typically includes market and control discounts, which are not considered in fair value calculations.
In summary, fair value and market value are both used to determine the worth of an asset, but they consider different factors and are used in different contexts. Fair value is based on factors like growth potential, replacement cost, and expected earnings, while market value is determined by market conditions and supply and demand.
Comparative Table: Fair Value vs Market Value
The difference between fair value and market value lies in their definitions, calculation methods, and usage. Here is a comparison table highlighting the key differences between the two concepts:
| Fair Value | Market Value |
|---|---|
| Refers to the actual worth of an asset, derived fundamentally and not determined by market forces. | Refers to the current share price at which an asset is traded, determined by the factors of demand and supply. |
| Used in accounting and financial reporting contexts. | Not used in financial reporting but determined by the market. |
| Considers specific circumstances surrounding the asset or liability, such as its current condition, location, and other relevant factors. | Does not consider specific circumstances and is solely determined by the factors of the demand and supply. |
| Often used to value specific assets or liabilities within a business, such as a piece of equipment or a loan. | Represents the price at which an asset would change hands between a willing buyer and a willing seller, both parties having reasonable knowledge of the relevant facts. |
| Fair value is the basis for various valuation methods, such as comparable company analysis, comparable transaction comps, asset valuation, and sum of parts. | Market value is the price of an asset in the marketplace, influenced by factors like investor demand and supply. |
In summary, fair value is a more objective and fundamental measure of an asset's worth, while market value is determined by the forces of demand and supply in the market. The two concepts are used in different contexts and serve different purposes in financial decision-making.
- Book Value vs Market Value
- Historical Cost vs Fair Value
- Assessed Value vs Market Value
- Factor Cost vs Market Price
- Market Price vs Equilibrium Price
- Salvage Value vs Book Value
- Close Market vs Open Market
- Capital Market vs Stock Market
- Money Market vs Capital Market
- Market vs Marketing
- Par Value vs Face Value
- Stock Exchange vs Stock Market
- Quality vs Value
- Value vs Worth
- Market vs Industry
- Free Trade vs Free Market
- Actual Cash Value vs Replacement Cost
- Stock Market vs Economy
- Present Value vs Future Value