Published online by Cambridge University Press: 15 September 2022
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This definition requires to characterize the relevant market under the current conditions of which the transaction will be conducted and the identity of the participants in that market (for more information, see Chapter 5). This is required since the market in which the transaction is conducted may impact the transaction price.
However, it should be noted that the term “market” is not expressly defined. In certain situations, such as in the case of financial instruments that are traded on several stock exchanges, the term appears to be sufficiently understandable, and the issue in question is which stock exchange's quoted prices should the instrument's fair value be based on. However, at times, the term may take on a more abstract meaning. Thus, for example, under International Financial Reporting Standard (IFRS) and according to the provisions of International Accounting Standard (IAS) 41—Agriculture, a reporting entity selling agricultural produce (e.g., apples) is required to measure the fair value of its produce at the point of harvest (under US Generally Accepted Accounting Principles (US GAAP), agricultural products are measured using historical cost until harvested). The apples are sold by the reporting entity in many markets (e.g., in wholesale markets as well as in retail markets), and they definitely have the potential of being exported to numerous countries worldwide, whose markets are characterized by different price levels. Here, according to the provisions of IFRS 13 (and Accounting Standards Codification (ASC) 820), in order to determine the fair value, it is essential to first select the market in which the measurement will take place.
Other cases in point include products such as cars. When determining the fair value of cars, it is first essential to identify the market in which the transaction will take place. Thus, for example, market sale prices in transactions between car importers and leasing companies (the leasing market) may be lower than the sale prices for private customers.