Fair Value or Market Value (GIPS)

What is the distinction?

fair value is between two knowledgable parties transacting at at an arms length (between two unrelated parties).

for the test just know post 2011 requires fair value.

For periods begining on or after 1 JAN 2011, valuations must be made

[a] in the view of a fair value defintition

[b] in the view of valuation principles underlying the GIPS

For liquid assets which have market prices in active markets, fair value and market value are the same. The differences come from the hierarchy for other cases, such as no market price for identical or similar assets in active or inactive markets, market-based multiples(p/e) or subjective unobservable inputs(pv of risk adjusted c/f).

Show backup please. Market value doesn’t specify arm’s length, does it?

I’m not sure about arm’s length in market value. Here is what is on P25 of GIPS:

“For liquid investments in active markets, the change to FAIR VALUE from MARKET VALUE will typically not result in a change to valuation…”, so my first statement was too strong. The rest are pretty much a last year’s mock.

This is where the curruculum simply leaves me hanging.

Let’s try the example of one’s home. How does fair value and market value play out? This is my guess: FV is putting my home on the market and waiting patiently in a slow market to realize a fair price. Market value is I need to sell my home immediately and I’ll take the highest offer I can get given a short time constraint?

No. Fair value is market value between knowledgable unrelated parties at an arms length.

Lets say that you realize you are under-water on your house and don’t have time to wait for a rebound. You decide to just sell it to your brother-in-law below market just to move the house and take a tax writeoff, and maybe he agrees to let you have some of the upside back later on down the road. This is what “fair value” is intended to prevent.

To my knolwedge the only meaningful distinction is the “between two knowledgable unrelated parties at an arm’s length”.

so what is market value then?

For Real Estate:

Requires an external valuation prior to 1-Jan-2012 at least once every 36 months.

After 1-Jan-2012 at least once every 12 months or earlier.

This valuation must be done by an external certified person…

this would decide the market value / fair value of the investment.

guys, come on. I’m looking for the intuition. If FV is between a knowledgable buyer and seller, what is MV – not between a knowledgable buyer and seller?

Again, for the 10th time… it is the arms length qualification. Additionally market value is not necessarily real, in the sense that you can see a bond quote which is someone “making a market” but that doesn’t mean they will necessarily transact at that price. Fair value is the price they are willing to pay at that very moment at an arm’s length.

You are focusing too much on this. Do you want to be able to explain what fair vaue is to someone, or do you want to circle the answer that says “fair value after 2011” and get your charter?

Knowledgeable - is the key. Buyer says a price, seller negotiates some - based on a target value in mind - without a “valuation” methodology. Buyer may know that the land underneath is a swamp - which the seller does not know about and does not care to check up on e.g. in the case of the “house” in question above.

It is like going to carfax and buying a cheap car - without looking at what had happened before to the car in question.