Fair Value of shares

There are some accountants who do not prefer to use Intrinsic Value or Yield Value for ascertaining the correct value of shares. They, however, prescribe the Fair Value Method which is the mean of Intrinsic Value Method end Yield Value Method. The same provides a better indication about the value of shares than the earlier two methods.

Fair value refers to the actual value of an asset a product, stock, or security that is agreed upon by both the seller and the buyer. Fair value is applicable to a product that is sold or traded in the market where it belongs or under normal conditions and not to one that is being liquidated. It is determined in order to come up with an amount or value that is fair to the buyer without putting the seller on the losing end.

Fair Value = (Intrinsic + Yield Value) / 2

Advantages of Fair Value Accounting

Fair value accounting measures the actual or estimated value of an asset. It is one of the most commonly used financial accounting methods because of its advantages, which include:

1. Accuracy of valuation

With fair value accounting, valuations are more accurate, such that the valuations can follow when prices go up or down.

2. True measure of income

With fair value accounting, it is total asset value that reflects the actual income of a company. It doesn’t rely on a report of profits and losses but instead just looks at actual value.

3. Adaptable to different types of assets

Such a method is able to make valuations across all types of assets, which is better than using historical cost value which may change through time.

4. Helps businesses survive

Fair value accounting helps businesses survive during a financially difficult time because it allows asset reduction (or the act of declaring that the value of an asset that is included in a sale was overestimated).