Question

How COVID-19 challenges the fair value measurement system?

Answer 1

Fair value is the value of the product or service which an entity would see in an orderly transaction that occurs between participants in principal market. Covid 19 has challenged the Fair Value system in the following manner:

1) Regulated transactions - companies in many sectors are facing regulatory restrictions on the form of price caps on products/ services (eg. medicines or essentials) or permanent closure (eg. salons) which is not creating a principal market

2) Valuation assumptions - Assumption of investors are not holding true because of Force Majure situation which is leading to valuation challenges

3) Future cash flows - organizations are struggling with staying afloat and ensuring future cash flows are attained

4) Best use cases for assets - Companies are redeploying the resources to ineffecient/ non-optimal uses to fight the virus and hence the assets are not being utilised optimally, leading to lower Valuation