What is the difference between fair value and book value

These non-straight-line MACRS depreciation methods result in tax depreciation being front-loaded into earlier years. Further, for property placed in service in taxable years beginning after Dec. From a U. The overall principle is similar to the tax accounting example in the sense that original unadjusted cost is applied to a depreciation curve, and a normal useful life is identified, in this case by utilizing accounting lives determined by the business owner.

Once the asset age has reached its normal useful life, the NBV will be equal to zero in our example, regardless of whether the asset is still in use and generating income. In examples 1 and 2, two different normal useful lives have been applied: Five years in the tax accounting example, and eight years for U. GAAP reporting. But both examples show an end result of NBV to be zero because the asset age reached or exceeded both the tax recovery period and the book life.

However, the asset still exists and is contributing to producing income for the business. Maintenance expenditures are still being applied to this asset. Is it reasonable to assume that the fair value of the asset is also zero? In valuation for financial reporting, the purpose is to calculate fair value. Table 1 provides a simplified valuation analysis to estimate the fair value of the asset; the underlying valuation methodology is outlined underneath. Table 1 Footnotes:.

Also, the appraiser could estimate the remaining useful life of the asset as of the Valuation Date. A net book value calculation starts with unadjusted original cost and is depreciated until NBV reaches zero for tax, or a salvage value amount for financial reporting, which is commonly observed to be assumed to be zero in practice.

In estimating a normal useful life, appraisers use actual normal service lives based on published industry resources, industry experience, and discussions with engineers, plant management, or other personnel with deep familiarity of the operations of the asset type. In the case of a delivery van or other vehicles, actual economic service lives could range from five to 10 years, and at the conclusion of service life, the asset could still hold an amount of residual value sell to junkyard for resale of parts or scrap recycle the metals and other recyclable parts.

In the application of the cost approach, there are three forms of depreciation that should be considered when calculating the fair value of assets: physical deterioration, functional obsolescence, and economic obsolescence. There are many factors that must be considered when performing a valuation, in addition to what is typically expressed with a simpler net book value calculation. Some factors that can increase the fair value of a machinery and equipment asset are:.

On the flip side, several factors can decrease the fair value of an asset. It can increase or decrease after you buy the asset. Fair value is used to figure replacement cost. Book value isn't used when replacing assets or figuring the amount of insurance needed on your current assets, as replacing an asset involves buying it at market price.

Fair value indicates whether your asset is priced too high or too low. Personal Finance Investing. Fair Value Vs. The balance sheet is a financial statement that depicts a company's financial condition at a specified moment. It shows what the company owns, its assets; what the company owes, its liabilities; and its net worth owners' equity , the difference between assets and liabilities.

Fair and book value are two metrics used to valuate the worth of balance sheet assets. Book value can have two definitions in accounting. The first defines the liquidation value of a firm as in bankruptcy liquidation. Book value can also refer to the depreciated value of fixed assets. Unlike buildings that are relatively easy to valuate, some balance sheet assets are hard to quantify without valuation rules that instill confidence that the process is logical and the results are rational.

SFAS sets guidelines for quantifying the fair value of assets based on the "selling" or "exit" price of assets in active markets. SFAS groups assets into three categories: Level 1 assets with active markets and verifiable selling prices; Level 2 assets without active markets and require computer modeling techniques using the selling prices of similar assets; and Level 3 assets that don't have active markets or similar assets for selling price equivalencies.

Fair value accounting requires companies to adjust assets in a timely manner to reflect current market prices.