Fair Value

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

Fair value is used as a measurement base to measure intangible assets that either has no current historical accounting value, or has a value that is significantly different from its historical cost. For instance, my phone is worth $1,000. It's useful life is 5 years. I've used it for 1 year. This means it has depreciated by $200. So the carrying amount is $800. But when I take it to a dealer, he says its worth $750.

The dealer's appraisal of $750 is its fair value, where it is highly probable that anywhere in the market, the market would value it at $750 regardless.

This method is increasingly popular amongst most reporting entities as well as standard setters.

However, there are problems of fair value regarding intangible assets.

Intangible assets are assets that have no physical form. Intangible assets may be a reporting entity's goodwill, logo, brand name, masthead, research and development, so on and so forth. For instance, Coca Cola's brand name, is worth quite a lump sum. Coca Cola's bottle shape, their logo, is highly valued.

But here lies the problem : How do they measure the value of something intangible? How can Coca Cola perceive their brand name "Coca Cola" to be worth, lets say, $200 million and put that in their balance sheet? What is the basis for that measurement?

Fair value has certainly received a lot of attention, even from standard setters, such as the International Accounting Standards Board (IASB). But how can something intangible, be measured by fair value, if there is no liquid and competitive market for it?

Certainly, the hand phone could easily be appraised by any hand phone dealers anywhere in the world. But is there anybody in the world who has the expertise, the authority, the knowledge, or the right to suggest a value of a brand name? Goodwill of that company? The value of their logo? The value of research and development which might be successful or unsuccessful?

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Any business and economics students or accounting students/graduates that might want to share some thoughts? I feel this is a thought provocative issue for students and practitioners of financial accounting.

I will post up other bases of accounting such as Historical Cost, Current Costs (Exit and Entry prices), Value in Use, and Replacement Cost soon, for comparison.

That's just on goodwill alone, which is, I admit, a rather unique intangible asset. That method of goodwill calculation is very much simplified. And it only applies to goodwill calculated during a business combination phase. How do you measure the goodwill in consolidated financial statements? How will you amortise goodwill? Can goodwill only ever be amortised? Why can't goodwill grow?

There are several academic journals I've read that were discussing the current accounting culture. The framework emphasizes on reliability, relevance, and hence neutrality. But is financial reporting really neutral? Financial reporting is really biased towards risk averseness. Why can assets only depreciate or be amortised?? Can't certain assets appreciate over time? Why do we always assume capital of the business will always devalue?

Why is that an accountant's default setting. That's a very good question to discuss and, if anyone is writing a thesis, that would be a good topic to consider.

Thanks for the replies so far. Looking forward to more, before I post my thoughts on it ;D

PS : Doesn't look as if there are many gurus in this area of study O_O but there are so many engineers and science discussions in this PhD area :3