Defining the Standard of Value
Standards at a Glance
Choosing the appropriate standard
of value is an important — and
sometimes difficult — decision that
requires input from valuators,
owners or investors, attorneys and
court directives. This chart defines
several common standards of value
and identifies possible situations
in which these standards may apply.
|
Standard |
Definition |
Possible
applications |
|
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. |
Federal and state tax
valuations and some
divorce cases |
|
Intrinsic value1 |
The value that an
investor considers, on
the basis of an
evaluation or available
facts, to be the “true”
or “real” value that
will become the market
value when other
investors reach the same
conclusion. When the
term applies to options,
it is the difference
between the exercise
price or strike price of
an option and the market
value of the underlying
security. |
Stock analysis and
option pricing
|
|
Investment value1 |
The value to a
particular investor
based on individual
investment requirements
and expectations. |
Management
decisions and
mergers and
acquisitions |
|
Fair value2 |
The value of shares
immediately before the
effectuation of a
corporate action to
which a dissenter
objects, using customary
and current valuation
concepts and techniques
generally employed for
similar businesses in
the context of the
transaction requiring
appraisal, and generally
without discounting for
lack of marketability or
minority status. |
Shareholder
dissolutions
and disputes |
|
Fair value3 |
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. |
Accounting compliance |
1Definitions from the
International Glossary of Business
Valuation Terms, which has been
adopted by the American Institute of
Certified Public Accountants (AICPA),
American Society of Appraisers (ASA),
Canadian Institute of Chartered
Business Valuators (CICBV),
Institute of Business Appraisers (IBA),
and National Association of
Certified Valuation Analysts (NACVA).
2Condensed from the Revised
Model Business Corporation Act’s
definition.
3Definition from FASB
Statement No. 157, Fair Value
Measurements. |
