Fair value
The price something would fetch in an orderly transaction today, ranked by how observable the inputs are — from a quoted price down to a firm's own model.
Where you will meet it
Fair value appears in 28 learning outcomes on the CFA syllabus. A few of them:
- Explain valuation based on assets and when it is suitable
“Asset-based valuation values a company as the fair value of its assets less its liabilities.”
- Explain the bases used to measure assets and liabilities
“Fair value measures the price in an orderly transaction today, and is subdivided by the quality of the inputs used: quoted prices, observable inputs, or unobservable model inputs.”
- Set out the different definitions of value and argue which one fits the valuation of a listed company best
“Fair value in financial reporting is an exit price in an orderly transaction between market participants.”
- Set out how IFRS classifies, measures and requires disclosure of: (1) financial asset investments; (2) associates; (3) joint ventures; (4) business combinations; (5) special purpose entities and variable interest entities
“Passive holdings follow IFRS 9: amortised cost for debt held to collect contractual cash flows of principal and interest, fair value through OCI for debt held to collect and sell (gains recycled to profit on sale) or for equities by irrevocable election (never recycled), and fair value through profit or loss otherwise.”
Practise it
Practise fair value until it is automatic: questions that explain every wrong option.
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