fair value of exit price lower then entry price

CFA Level II
#1

Under US GAAP SFAS 157, fair value is the exit price (i.e. the price received by the seller), which will likely be lower than the entry price paid by the buyer in a transaction. IFRS does not have such definitions… So what does this exactely mean. can someone make an example…sorry i just don’t get it. in a transaction the price paid is one price. so what is the conclusion here? Thank you! p. 309 FROM SCHWESER.

#2

Thanks for posting this question, it was really counterintuitive to me too and I still dont get this. The way I saw this was exit price should always be more than the entry price as the private company sould be able to increase the business value trhough : efficient management alignment of interest betweeb mgt and ownership access to funding (i think) given all these factors surely the exit price should be more than entry price, otherwise why would one get into a transaction like this (exit price

#3

yellayella Wrote: ------------------------------------------------------- > which will likely be “lower” than the entry price > paid by the buyer in a transaction. > > p. 309 FROM SCHWESER. Looks like an errata to me. Can someone please confirm.

#4

Imagine there is a bid/offer spread. US GAAP says that fair value is the price received by seller. It means that Fair value under US GAAP would be the bid price, …something like that. Thats how I understand this.

#5

rus1bus. Amount paid by buyer - various fees/transaction cost = amount received by seller, thus amount paid by buyer >= amount received by seller.

#6

Thanks elcfa. Got it. I was mistaking it for 2 different transactions at 2 different times, where the party is buyer the first time (entry) and seller the 2nd time (exit). I was totally off!! pfcfaataf, your understanding in terms of spreads is accurate too.

#7

ok makes sense! thanks!

#8

Amazing how many of us got that one wrong ( including me ) , I think it has to do with the wording . Enetry and Exit are trade related for one party . Here it is just trying to establish which price is the valuation price for an acquisition but we’re mixing it up with trades in our mind