Fair market value definition
/What is Fair Market Value?
Fair market value is the price that two parties are willing to pay for an asset or liability, if both parties are well-informed about the item in question, neither one is under pressure to buy or sell, and there is no time pressure to complete the deal. If these conditions are present, the final price established between the parties should reasonably reflect the fair market value of the asset or liability on the date of the transaction.
How to Estimate Fair Market Value
When it is not possible to locate one of the preceding transactions, it may be possible to estimate fair market value based on a cluster of data points from prior actual market transactions, extrapolated for the asset or liability that is under review. Another option is to derive it from the fair market values of similar products, or by estimating the net present value of the cash flows estimated to be derived from it in the future.
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How Fair Market Value is Used
The fair market value concept is used for many purposes, including establishing the replacement cost of an insured asset, establishing the tax basis upon which property will be assigned a property tax, and establishing the basis for damages in a court award.