Virtual Business Valuation Round Table: Definitions

Editor’s note: This is a Web-exclusive sidebar for “Valuations for Financial Reporting in Today’s Market,” May 09.

The following definitions from the International Glossary of Business Valuation Terms or Glossary of Additional Terms may help readers who are not active business valuation analysts.

Standard of Value—the identification of the type of value being used in a specific engagement (for example, fair market value, fair value, investment value).

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. (Note: In Canada, the term “price” should be replaced with the term “highest price.”)

Intrinsic Value—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.

Fair Value. In valuation applications, there are two commonly used definitions for fair value:

• For financial reporting purposes only, 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. Source: FASB definition in Statement no. 157, Fair Value Measurements, as used in the context of GAAP (Effective 2008).
• For state legal matters only, some states have laws that use the term fair value in shareholder and partner matters. For state legal matters only, therefore, the term may be defined by statute or case law in the particular jurisdiction.

Resource: The International Glossary of Business Valuation Terms and the Glossary of Additional Terms appears as Appendices B and C, respectively, in Statement on Standards for Valuation Services No.1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset.