Fair value

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The fair value (German technical term: fair value ) is a value concept for the valuation of assets or debts in Anglo-Saxon accounting ( IFRS and US GAAP ).

According to IFRS 13.9, the fair value is the price that would be received for the sale of an asset or paid for the transfer of a liability in an orderly business transaction between market participants on the measurement date.

In contrast to fair value , value in use is a subjective valuation approach that reflects the individual benefit of the asset for the company.

Since the German Accounting Law Modernization Act (BilMoG) came into force in 2009, the fair value has also been used in German commercial accounting .

International Financial Reporting Standards

With the IFRS 13 standard, there is an independent standard for determining fair value. A large number of other standards contain specific regulations for the application of the fair value concept in the valuation of balance sheet items.

General principles of valuation

The fair value is an (actual or fictitious) objective market or current value, the determination of which must be abstracted from the specific circumstances of the company and based on general market conditions. This is where the fair value differs from the (internal) value in use .

The valuation is based on knowledgeable and fundamentally willing parties who know the relevant pricing parameters and are able to assess them correctly, and who are both interested in pricing. The parties must also be independent of one another. The aspect of the independence of the parties becomes particularly relevant when it comes to distress sales, foreclosures or sales in the context of liquidation.

Three-level hierarchy of valuation

overview

To determine the fair value, there is a three-level valuation hierarchy in accordance with IFRS 13.72:

1. Level 1 input factors are quoted unadjusted prices in active markets accessible to the company on the measurement date for identical assets or liabilities (IFRS 13.76). At this first level of the hierarchy, we speak of market prices .
2. Input factors on level 2 are other than the market price quotations listed on level 1, which can be observed either directly or indirectly for the asset or liability (IFRS 13.81). Comparison values ​​are used at this second hierarchical level .
3. Input factors at level 3 are input factors that are not observable for the asset or liability (IFRS 13.86). Estimates are used at this third level of the hierarchy .

This hierarchy expresses a preference of the standard setter. If possible, market prices are to be used to determine the fair value. If these are not available because the asset to be valued is not traded on an active market as defined by the IASB, comparison values ​​should be used. If comparative values ​​are also not available, the last step is to check whether a value can be determined using estimated values ​​(valuation models).

If a reliable valuation is not possible even with valuation models, a cost-based valuation should be carried out instead of the fair value.

Market prices

A market price is the price that is paid (at the same time) for comparable assets such as the asset to be valued in an active market on the balance sheet date. Comparable here means that all price-forming parameters are (largely) the same, so that no adjustments to the observed price have to be made. An active market is characterized by the fact that (largely) homogeneous assets are traded at publicly available prices and buyers and sellers willing to enter into a contract can usually be found at any time. In practice, only very few markets, such as securities and commodities exchanges, meet the standard setter's requirements for an active market. As a rule, there are no market prices for the vast majority of assets, so that reference values ​​or estimates have to be used.

Comparative values

If it is not possible to determine the value on the basis of market prices, either past (but current) prices for similar assets or current prices for assets of a different nature must be used. Since there is no complete homogeneity with regard to all price-setting parameters, additions to or deductions from the observed value must be made. The valuation using comparative values ​​therefore systematically contains greater discretion than the valuation using market prices and the degree of reliability and objectivity of the valuation decreases.

Estimates

The third method for determining fair value is an estimate based on valuation models. As a rule, cash flow- based methods ( discounted cash flow ) are used for this. The fair value of a managed property can be determined on the basis of the discounted rental or lease income, using values ​​that are as objective as possible and observable on the market.

Treatment of evaluation successes

When the book value is written up or down to a (new) fair value, book gains or losses arise . When dealing with such valuation successes, IFRS have two methods. In the revaluation method (English revaluation model ) Depreciation is immediately recognized in the income statement recorded reversals are, however, first recognized in a revaluation reserve recorded. This is only released when the asset is written off to the income statement. The revaluation method can be used, for example, for the valuation of property, plant and equipment (IAS 16) and intangible assets (IAS 38).

With the fair value model , also known as full fair value accounting, write-ups and write-downs are always recognized immediately in profit or loss. There is also talk of a fair value valuation with an equal impact on profit or loss .

use

The fair value is the fundamental value concept preferred by the IASB, as it is considered to be particularly useful for decisions compared to acquisition or manufacturing costs . The scope of application of the fair value concept has been expanded more and more within the IFRS over time. Fair value accounting is currently used in particular for the following items:

• Property, plant and equipment (IAS 16) as part of an option in subsequent valuation
• intangible assets (IAS 38) as part of an option for subsequent measurement
• certain financial instruments (IAS 39) as part of the initial and subsequent measurement
• Investment properties (IAS 40) within the scope of an option in the subsequent valuation
• biological assets (IAS 41), mandatory application

US GAAP

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German commercial law accounting

With the Accounting Law Modernization Act (BilMoG), the fair value concept has also found its way into German accounting under commercial law. This resulted in a partial approximation of the IFRS.

definition

“The fair value corresponds to the market price. If there is no active market on the basis of which the market price can be determined, the fair value must be determined using generally recognized valuation methods. ”( Section 255 (4) HGB) This definition largely corresponds to the fair value concept of IFRS.

application

The fair value concept is currently only used in HGB accounting for a few special issues:

• Valuation of plan assets in connection with accounting for pension obligations ( Section 246, Paragraph 2, Clause 3 in conjunction with Section 253, Paragraph 1 of the German Commercial Code)
• Provisions for pension obligations, insofar as the amount is determined solely by the fair value of securities used as plan assets ( Section 253 (1) HGB)
• When accounting for valuation units as part of hedge accounting
• In bank accounting : valuation of financial instruments in the trading portfolio ( Section 340e (3) HGB)

literature

• Jörg-Markus Hitz: Keyword fair value in accounting . In: Business Administration . 66th year, 2006, pp. 109-113.
• Mary E. Barth, Wayne R. Landsman: Fundamental Issues Relating to Using Fair Value Accounting for Financial Reporting . In: Accounting Horizons . Vol. 9 (4), 1995, pp. 97-107. ISSN  1558-7975
• Hartmut Bieg, Reinhard Heyd (ed.): Fair Value. Assessment in accounting, controlling and finance . Vahlen, Munich 2005, ISBN 3-8006-3088-5 .
• Kadel: Extraordinary depreciation and current value in the German and US-American commercial and tax balance sheets - a comparative study on the justification of partial value depreciation in tax law

Web links

• Michael Jahke, The accounting treatment of structured financial instruments according to IFRS and HGB, 2009 .
• Brief information from the University of Regensburg on fair value accounting
• Private information portal

Individual evidence

1. ↑ J. Baetge, H.-J. Kirsch, S. Thiele: Balance sheets . 8th edition. Düsseldorf 2005, p. 263 .
2. ↑ M. Scharf: The formation of valuation units according to IFRS / IAS, HGB and balance sheet tax law No. 10 of the analyzes and reports on economic and tax law . TU Darmstadt, Faculty of Law and Economics, 2010, p. 44 ( tu-darmstadt.de ).