Fair Value

Intermediate 💰 Finance / Accounting

Definition

The price at which an asset would trade in an orderly transaction between willing parties, a theoretical concept that accountants somehow need to calculate. It's what something should be worth in an imaginary perfect market.

Example Usage

Determining fair value for the illiquid private equity holdings required complex models and generous assumptions about future exit multiples.

Origin

Became prominent with mark-to-market accounting standards in the 1990s and 2000s

Fun Fact

Fair value accounting gets blamed for financial crises because it forces recognition of losses, as if pretending assets are worth more would somehow help.

Source: FASB ASC 820 and IFRS 13

Related Terms

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cost basis

The original purchase price of an asset used to calculate capital gains taxes, proving that the IRS wants documentation of every financial decision you've ever made. Lose track of it and prepare for tax-time panic.

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accounts payable

Money a company owes to suppliers and vendors for goods or services received but not yet paid for. The grown-up version of 'I'll pay you back later,' except with purchase orders and payment terms.

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drawdown

The uncomfortable moment when your investment portfolio decides to take an unscheduled vacation to lower valuations, or when you deliberately deplete resources like troops, funds, or your emergency whiskey stash. In finance, it's the peak-to-trough decline that makes investors question all their life choices. Essentially, it's the distance between 'I'm a genius' and 'I should have bought bonds.'

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Segment Reporting

Breaking down financial results by business unit, geography, or product line to show which parts of the company are actually making money. It's where corporate winners and losers get exposed despite management's attempts at averaging.

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Revenue

The total money a company brings in before subtracting any expenses, which is like bragging about your salary before mentioning your rent, taxes, and crippling avocado toast habit. Startups love to talk about revenue growth while conveniently forgetting to mention they spend two dollars for every dollar earned.

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window dressing

The practice of making financial statements look prettier than reality through perfectly legal but ethically questionable timing of transactions. It's like cleaning your apartment only when you know someone's coming over.

💰 Finance / Accounting

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