Fair value

What it means

Fair value is the amount at which an asset would change hands between informed, independent parties. Slovak rules prescribe it only in defined cases, not as the ordinary basis of measurement.

Most assets are carried at acquisition cost less depreciation and impairment. Fair value applies, for instance, to securities or assets acquired for nothing.

Fair value is not the price one particular buyer with a special interest would pay, nor the amount raised in a forced quick sale. It assumes ordinary market conditions and ignores advantages only one bidder can see, which is why it can differ from the price the parties finally agree on in the sale of a business.

How it works in practice

For assets with no market price the value comes from an expert report or a model. The method used belongs in the notes to the financial statements so the basis of the number is visible.

Under IFRS fair value is used far more widely. That is why Slovak statements and group reporting can differ without anyone having made a mistake.

In a small company fair value comes up most often with assets acquired for nothing, such as a car donated by a member: it is booked at fair value, which has to be supported by an expert report or a comparison with market listings. For a contribution in kind to registered capital, the value is set by an expert valuation.

What to watch out for

Revaluing to fair value is not a way to dress up the balance sheet before meeting a bank. Applied where the law does not allow it, both the auditor and an inspection will reverse it.

Depending on the type of asset, a change in fair value goes either through profit or loss or straight into equity, and the tax treatment need not follow the accounting. Miss that and you either pay tax on a revaluation that was not taxable or forget the deferred tax, and the statements no longer agree with the return.