Financial Reporting Standard (FRS) in Wareham Cameron & Co Ltd & others (2003) defined Fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Other terms commonly used to describe fair value include market value, open market value and current market value. Fair value is considered to be the most appropriate basis of valuation because it represents the exchange value of the future economic benefits embodied in the asset regardless of the manner in which the entity has chosen to utilise the asset. Where the fair value of an asset can be determined by reference to the price in an active market of the same asset, or a similar asset, the fair value of the asset is determined using that information. But where the fair value of an asset is not able to be determined in that manner, the fair value of an asset is determined using other market-based evidence, such as a discounted cash flow calculation. Where the fair value of an asset is not able to be reliably determined using market-based evidence, depreciated replacement cost is considered to be the most appropriate basis for the determination of fair value (FRS-3, paragraphs 4.23, 4.2, 4.26 & 47.3).
The International Valuation Application 1 under Valuation for Financial Reporting (5.4), i.e., Valuations under IAS 16 provides as follows:
“Where an entity adopts the fair value revaluation option under IAS 16, the assets are included in the balance sheet at their fair value as follows:
- “The fair value of land and buildings are usually determined from market based evidence by appraisal that is normally undertaken by professionally qualified Valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal” (IAS 16, para. 32).
- “If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold, except as a part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach” (IAS 16, para. 33).
