The mere phrase, Valuation of a Fair-Value, sets a discourse on describing the relevant and appropriate attributes of a valuation process for a business or types of assets, whether tangible or intangible. In order to identify attributes, the purpose or objective of valuation will further refine the contrasts or comparative analysis between valuation and Fair Value (“FV”).   The valuation of businesses and assets can be conducted for a variety of reasons and objectives of stakeholders, but to treat the resultant value of a valuation exercise, as a Fair Value, invokes a need for defining the term Fair Value.

Definitions of Fair Value

It will not suffice to define the term FV as a general term, without identifying the purpose or application of the term FV. Inland Revenue Authority may have its own version of FV for taxation and deduction of expenses purpose. Business owners and investors will view a firm in context of its operations to determine FV. For instance, Singapore Financial Reporting Standards International, (SFRS(I)) provides the following definitions:

(i) Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

(ii) Fair Value: The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.

(iii) Fair Value: For the purpose of applying the lessor accounting requirements in SFRS(I) 16, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

The definitions above provide three common characteristics or attributes of FV: 1) valuation on the presumption of a transaction at a point in time, 2) arm’s length transaction i.e., independence of the parties, and 3) there are willing parties knowledgeable about the assets or the Business.

The contrasting elements in the three definitions are distinct in purpose, parties, and context of a transaction or deemed transaction. The definition (i) is on the premise that there is a market for sellers and buyers viz shares of public listed companies. The definition (ii) is on the premise of availability of knowledgeable and willing sellers and buyers. This is also applicable for intangible assets. However, the criteria of determining fair value for intangible assets varies with the nature of such intangible assets and the date of acquisition. The definition (iii) is for accounting and reporting purposes for Property, Plant and Equipment, but is based on the premise of willing and knowledgeable parties, if could be available.

Fair Value and Market Value may not be of equivalent values or same terms as each depends on the context and the standard(s) being adopted in defining Fair Value. In accordance with International Glossary of Business Valuation Terms, the term Fair Market Value is adopted with the definition as:

Fair Market Value:

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 arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Contrast between Reasonable Value and Fair Value?

The term reasonable, carries with it a connotation of subjectivity and prevailing circumstances. The value of a going concern under unhindered and unrestricted market conditions would be different from the value of a firm under liquidation. The valuation under forced liquidation or foreclosure by mortgagors and lending institutions or creditors; such value realized on the day of auction would be considered as the reasonable value. This may be considered as Fair Value given the circumstances but not the true value or intrinsic value under normal operating conditions.

There would be further twists to the definition of reasonableness. It becomes a subject of legal interpretation and may be considered in accordance with the standard under the applicable law to the terms of transaction agreement and tests of reasonableness. In general, the standard of reasonableness is dependent on the facts of the matter and agreement between the parties. For matters related to public policy and duties of the office bearers to general public, then relevant laws may be referred. For instance, the Singapore Unfair Contract Terms Act (UCTA) provides a test of reasonableness for contract terms and conditions.

In the context of Fair Value determination for an unbalanced market participant, the market value of that entity may be considered reasonable in the following situations, though share market prices may not be reflective of its fair market value:

  • Prices are influenced by external factors, i.e., a boom/panic, that may have some temporary impact but often no direct/indirect impact on the fair market value of the company shares which are not influenced by transient changes.
  • Minority share interests, which are usually subject to discount to make them saleable, often comprise of the majority of stock trades and therefore, do not reflect the fair market value of a controlling shareholding (although adjustments can be made for this factor).
  • Often only a few trades are made (sometimes even over an extended period of time) because of the small equity available.
  • Trading can be influenced by high-pressure promotional campaigns.
  • Large blocks may be traded pursuant to a takeover bid.

Fair Value, Fair Market Value should be ascertained with reasonable care given the contextual information and the premise of the valuation. It is not a purely accounting exercise but requires business acumen, legal knowledge, and foresight of the future economy for developing an appropriate valuation model. Risk identification and Enterprise Risk Management system forms the foundation of such a valuation model.


Knowledge on both Fair Value (FV) & Fair Market Value (FMV) offers and enables one to have a meaningful insight into a Company/Stock/Asset valuation.

Understanding and being able to distinguish the differences between Fair Value and Fair Market Value is indeed significant, particularly when the need for a valuation of a company or an asset becomes material in negotiations and or claims for dispute resolution process.

Similar to all financial measurement tools & methodologies, being able to compare both FV & FMV with domain knowledge and having clarity on the advantages & limitations of these two different value variables, can certainly enable investors to determine, whether a particular company/asset/stock is overvalued or undervalued, given its assets and liabilities; factoring in also its abilities, competencies & resources to generate and sustain future income. That in turn, will go a long way in helping the investors make prudent investment decisions.

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