Question

How is "fair value" determined? What is the usual basus for fair value? Please explain in detail

Answer 1

Fair value is determined on the basis of the current market value. In other words Fair value is an estimated price at which an asset can be sold or a liability settled in an arm's length transaction to a third party under current market conditions.

The above definition can be broken into following parts :

1.Current market conditions: Fair value should be based on current market conditions and not on some earlier presumptions

2.Arm's length transaction: Fair value should be derived on the basis of arm's length transaction .Arm's Length transaction means  where none of the party are under the influence of the other

3.Estimated price : Fair value is just an estimation which is made on the measurement date. As the market keeps fluctuating the fair value also fluctuates.