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Fair value (“FV”) and fair market value (“FMV”) are important terms often used in our business valuations and advisory practice. Although sometimes used interchangeably in the marketplace, FV and FMV have slight nuances that differentiate them.
In technical terms, FV and FMV are defined as follows:
FV – In accounting terms, FV is “the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act”. This definition is normally applied in determining the level of goodwill and intangible assets for financial reporting purposes.
FMV – “The highest 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.”
While although similar, what differentiates FMV from FV is that the price is determined in an open and unrestricted market. We often see FMV differentiate from FV in these two common situations: