An objective valuation would be the price at the time of sale between an informed buyer and an informed seller. For those times when it is not desirable or possible to sell, choosing the appraiser and purpose of the valuation becomes critical. Under the proposed changes to generally accepted accounting principles, appraisals to adjust historically valued assets to fair market value may prove necessary.
The same property or business valued for different purposes on the same day could have dramatically different values. Historical cost has been used throughout the United States for many tax and banking processes until recently. Financing looks at the future benefit or expected benefits, and the appraisal discounts for lack of control or marketability allow the user to see the reasons for the valuation. Premiums can be assigned for synergy and opportunities. Clarity on the purpose for the evaluation is essential as it defines both the cost and the level of service required. Purpose of use may trump the valuations method as well as the discounts or premiums assigned.
Fair Market Value is defined as:
The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to by or sell and when both have reasonable knowledge of the relevant facts.
The user needs to clearly understand the purpose for the valuation and the asset, income, or market use. There are no subsequent events related to valuation. Any assumption may have changed dramatically. The reader is forced to critically examine the report and the assumptions on a line by line, concept by concept valuation.
The car once driven off the dealer lot does not carry the same market value as the car sitting on the lot with less than 50 miles on the odometer. A condo with a legal action filed against the management service may not be marketable without a large discount until the law suit is settled.
Accounting concepts in the United States are undergoing rapid changes. International accounting convergence is still planned. Please contact me for more information.