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09 Apr

Standards of Value: different definitions of value

Posted in General valuation topics, Valuation dictionary on 09.04.09

There are many different types of value. Below are a number of the types of value and examples of when they may apply.

Fair Market Value: This type of value is used for estate and
gift tax reporting purposes, valuations for contributions to charities, valuation of ESOPs and other compliance purposes. Revenue Ruling 59-60, which is the definition used by the IRS, defines fair market value as “the amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Fair Value: There are two different types of fair value, one
for litigation purposes and one for financial accounting reporting purposes.

•• Statement on Standards for Valuation Services issued by the AICPA
defines fair value for financial reporting as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is the type of value used by companies when adjusting their assets or liabilities to fair value on their balance sheets under Generally Accepted Accounting Principles.

•• Fair value for litigation purposes is defined in each state either
by statute or through case law. This type of value is used to value interests in legal disputes between shareholders, partners or members.

Intrinsic Value: This type of value is defined by the
International Glossary of Business Valuation Terms as “what an investor considers, on the basis of an evaluation of facts, to be the ‘true’ or ‘real’ value that will become the market value when other investors reach the same conclusion. Investors and analysts use this type of value to determine if stocks are selling at their true value.

Investment Value: This type of value is defined by the
International Glossary of Business Valuation Terms as “the value to a particular investor based on individual investment requirements and expectations.” Each buyer and seller has his or her own value based on specific investment objectives.

Net Book Value: Net book value is synonymous with the net
worth (or shareholders’ equity) of the business. It is the total net assets less the total liabilities as stated on the balance sheet of the business. The assets and liabilities are stated at historical cost, which may not be reflective of their current values.

There are other types of value as well. Rob Slee in his book Private Capital Markets, defines other types of value including economic value, insurable value, collateral value, owner value, and market value to name some others.

Sometimes the type of value is not as clear would seem. For example, in a divorce, some states use fair market value, while others may lean
towards the litigation type of fair value.

For more information on standards of value and the valuation process, please click here.

© 2009 Florida Business Valuation Group


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