Difference Between Fair Value & Fair Market Value

Fair value of an asset is determined by using mathematical models in the finance theory. The fair value determined through these models can be substantially different from the fair market value of the same asset in certain cases. The fair market value is determined by the market forces and the demand and supply for a certain product or service.

Why is Fair Value Different From Fair Market Value?

The difference is between the methodologies used to determine the value of an asset in either case; the fair market value is not dependent on mathematical models and determines the value of an asset using the demand and supply of an asset in the market.

Fair Value

The models used to estimate the fair value of assets are called fundamental models. These models use fundamental factors including financial and economic data to estimate the intrinsic or the fair value of an asset. Most fundamental models follow a simple underlying rule; they aim to estimate the current value of an asset by discounting the expected future cash flows from the asset to their current or present value. For example, the future expected dividends expected from a stock are discounted to their present value to determine the fair value of that stock today.

Fair Market Value

The fair market value is determined by the interaction of demand and supply for that product. This value should theoretically be close to the fair value of the asset but can differ substantially since the inputs used in estimation of the fair value are all subjective and prone to uncertainty. The fair market value is determined by the buyers and sellers in the market.

Analyst Considerations

The inputs to the estimation of the fair value should be appropriately measured to arrive at the correct fair value for any asset. Analysts believe that assets will trade at their fair values in the long term and the fair market value may deviate from the fair value because of market anomalies. Market anomalies include financial barriers, mispricing or improper market expectations.

Accounting Disclosures

Financial statements require disclosure of the fair market values for liquid investments held by a company. Fair market values for these investments can be obtained easily as these investments are liquid. Companies base their investment decisions using a comparison between the fair value estimated by company analysts and the fair market value of an investment. However, the requirements for accounting disclosures ask for disclosure of the fair market value and not the estimated fair value of an asset.

References

• "Wiley Guide to Fair Value Under IFRS;" James Catty; 2009
• "Fair Value Measurements: Practical Guidance and Implementation;" Mark Zyla; 2009
• "International Financial Reporting Standards: A Practical Guide;" Hennie Van Greuning; 2009