What Is True and Fair Value?

Fair Value (Fair Value) Also known as the fair market price, the fair price. The price determined by the buyer and the seller who are familiar with the market conditions under fair trading conditions and voluntary conditions, or the transaction price at which an unrelated party can buy or sell an asset or settle a liability under fair trading conditions. Under fair value measurement, assets and liabilities are measured based on the amount of voluntary exchange of assets or debt settlement between the two parties in a fair transaction who are familiar with market conditions. The purchaser's record of the combined business requires the use of fair value information. In practice, the net assets of the merged company are usually assessed by the asset appraisal agency.

Fair value

1.The market value of securities

In one of the following three situations, the fair value of the assets that are exchanged in or out are considered to be reliably measured:

1. There is an active market for the asset being swapped in or out, and the fair value is determined based on the market price.

2. There is no active market for the asset being exchanged in or out, but there is an active market for similar or similar assets. The fair value is determined based on the market price of similar or similar assets.

3. There is no comparable trading market for similar or similar assets when assets are exchanged in or out, and the fair value is determined using valuation techniques. When the valuation technique is used to determine the fair value, it is required that the fluctuation range of the fair value estimate determined by the valuation technique is small, or that within the fluctuation range of the fair value estimate, various probabilities for determining the fair value estimate can be reasonable determine.

Theoretically, there are two sources of fair value: market price and future

Conditions for determining fair value using evaluation models

The IAS39 Usage Guidelines set out the conditions for determining fair value using an assessment model:

(1) The purpose of using this method is to establish the possible transaction price on the measurement date, which is the normal transaction price under general commercial considerations;

(2) The value evaluation method should try to include all factors considered by market participants in pricing;

(3) As far as possible, use the current market price of the same commodity or observable market information to test and correct the effectiveness of the evaluation method. In addition to considering these three conditions, the use of data input, observable market information, and other unobservable factors that may affect the fair value of financial commodities should also be considered. For example, observable market information for bond commodity valuations, that is, the market on the measurement day

The significance of fair value in the merged company

Even small changes in data entry can lead to considerable differences in assessment results. The evaluation data related to the fair value of financial commodities include interest rates, price volatility, credit risk and other materials with significant impact. Since valuation methods are often used when public quotes are not available, market information should be used wherever possible.

The following table describes common data inputs and their sources:

Data entry	Information source or estimation method
Benchmark interest rate	Represents a risk-free rate of return, usually from observable government bond rates.
credit risk	Observable market prices from different credit financial commodities that are traded, Or observable interest rates for borrowers with different credit ratings.
Foreign exchange rate	There are usually active markets and daily public quotes
Commodity price	Observable market prices
Price volatility	Reasonably estimated from historical market information or used implicitly in the current Market price volatility
Equity Commodity Price	The price of traded equity goods can be observed in some markets, If there is no transaction, you can use the discount method to estimate the current price.

Specific analysis of the relevant information of derivative products to reasonably locate its fair value

Some derivative commodities or securities are rarely traded centrally in the market. In practice, information provided by counterparties is often used as the basis for fair value accounting. Although the price information is provided by the counterparty, management is still responsible for the fair value measurement results of financial products in the financial statements. Sometimes the estimates used by the counterparty in providing its fair value take into account its own purpose, thereby losing the fairness of the value of the commodity. Therefore, when using the price information provided by the counterparty, procedures should be set up to verify its fairness and appropriateness, including assessing whether its methods are appropriate, whether major assumptions are reasonable, and the timeliness and reliability of basic information.

In addition to the above verification procedures, it is also necessary to understand the market environment when the counterparty provides the price and determine whether the price provided by it is in line with the definition of fair value. Judgment methods include: consulting the quotations of several current banks, and comparing them with the prices agreed in advance; if the quotations cannot be obtained from banks, etc., the price information may only be obtained by the market or a third party based on its own or internal development. The evaluation model provides. At this time, it is still necessary to judge whether the evaluation model used and the forecast input of cash flow are reasonable, because the evaluation model and the input parameters often involve a considerable degree of professional judgment and evaluation technology, market factors affecting fair value, Speculation on the expected market, etc. According to actual needs, you can consider using external experts to make judgments, such as using the expert's evaluation model to recalculate the fair value to independently verify the fairness of the price provided by the opponent. It can also be compared with subsequent transactions.