Fair Value Measurement for Financial Reporting
Companies that are required to prepare financial statements for external reporting face complex and serious issues. Failing to timely file financial statements or comply with the reporting requirements could lead to fines, lawsuits, or other damaging consequences. Moreover, with fair value accounting (also known as the mark-to-market accounting practice) becoming more prevalent today, financial executives responsible for filing the financial statements have a more demanding role than ever before.
An investor wants to know how well the company is performing according to a set of standardized rules and measurements that a company has not fabricated to make it look good. Similarly, creditors and banks that have lent money or are considering lending money to a business, need an accurate assessment or understanding of cash flow and how likely they are to be paid back.
Why Does Fair Value Matter?
In recent years, fair value accounting has become an important measurement basis in financial reporting. Under fair value accounting, companies measure and report the value of certain assets, liabilities, and expenses at fair value. Changes in asset or liability values over time generate unrealized gains or losses for assets held and liabilities outstanding, increasing or reducing net income, as well as equity in the balance sheet.
Fair value reporting issues are as important for private companies as they are for public companies. Even private equity firms and other institutions that communicate essential financial information to their stakeholders, investors, and creditors must adhere to these standards.
Based on the latest edition of RICS Valuation – Global Standards (‘Red Book Global Standards’) which is effective from 31st January 2022, the same date as the latest edition of International Valuation Standards became effective, The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.
It is thus sometimes described as a ‘mark to market’ approach. Indeed the references in IFRS 13 to market participants and a sale make it clear that for most practical purposes the concept of fair value is consistent with that of market value, and so there would ordinarily be no difference between them in terms of the valuation figure reported.
A fair value measurement requires an entity to determine all of the following:
- the particular asset or liability that is the subject of the measurement (consistently with its unit of account)
- for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use)
- the principal (or most advantageous) market for the asset or liability
- the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.
Engaging a Valuation Firm
Due to the complex nature of these valuation issues, combined with the standards under fair value reporting, financial executives often engage independent valuation firms, especially when that executive or company lacks the expertise or resources to perform fair value opinions.
Because of our trusted experience and knowledge, audit firms, legal professionals, and tax advisors consistently refer their clients to Demos Georgiou & Associates LLC (DGA). We provide a full range of valuation services to support fair value reporting requirements that withstand scrutiny from auditors and other regulatory bodies.
We offer a broad range of experience with fair value financial reporting issues. Our professionals have in-depth knowledge and understanding of the reporting requirements and best practices in financial reporting valuations.
DGA provides a full range of fair value measurement services. Our analyses and conclusions have been widely accepted, withstanding the scrutiny of auditors, and other regulatory bodies. We have deep experience, providing fair value‒related services to businesses and organizations, including public and private companies, private equity firms, early stage enterprises, and other closely held businesses and partnerships.
Demos Georgiou MSc, ΜRICS
BSc (Hons) Property Management and Investment
RICS Registered Valuer
Contact us for a professional and dependent assessment of your property’s market value.