Fair Value Definition

The term "fair value" is typically used in finance and economics. It is defined as an unbiased estimate of the market price of any good, service or asset. In accounting, the fair value of an asset is used to estimate its market value if there is no established market for the particular asset. Fair value is also used to determine the worth of an asset for when its value varies from market to market.

Not Market Value

Although market value may be the same price or number as fair value, the two are not the same. Fair value takes into consideration the fair price between a buyer and seller, and includes both the advantages and disadvantages each will obtain from the sale. Market value is a bit simpler, in that it's the price of what the sale would be in a wider market.

Objective Factors

Fair value is determined by a few objective and subjective factors. The objective factors taken into consideration are acquisition costs, production costs, distribution costs, replacement costs and supply versus demand.

Subjective Factors

The factors that subjectively determine the fair market value include risk factors, capital costs, and individual perception of the asset or utility.

Market Price

One school of thought believes that in an organized market, the market price and fair value are very close, if not equal. However, it is also believed that market price deviates from fair value due to bias and other unpredictable anomalies.

Futures Market

For a futures market, which is an auction for commodity and future contracts for delivery on a future date, the fair value has a slightly different definition: It's not an unbiased estimate for the futures, but a price determined by both bidding price and compounded interest over time for a futures contract.