Fair value adjustment is an accounting process that reassesses an asset’s fair value when there is a material difference between it and the current book value. The process involves identifying the current market value and comparing it to the book value and current fair market value to arrive at a fair and reasonable amount for the adjustment. The approach is often based on factual information, but there may be some subjectivity involved.
A fair value adjustment is a type of accounting process that allows fair value to be reassessed when there is a material difference between that figure and the current book value of an asset. Managing this type of adjustment requires taking time to engage in what is known as reappraisal to bring the two figures closer to harmony. There are a number of reasons why a fair value adjustment may be necessary, including significant changes in the market value of the assets involved, or where the assets are involved in a business acquisition.
The exact process of making such an adjustment will depend on the type of asset involved and what has occurred to create a wider disparity between the currently identified fair value and the book value of that asset. For example, if the asset involved is real estate, then the process will require identifying the current market value, based on increases or decreases in demand for similar properties in the immediate area. This can be compared to both book value and current fair market value and is taken into account when determining a fair and reasonable amount for the adjustment.
One of the most common approaches with fair value adjustment is based on identifying a similar event or situation for comparison, and then adjusting accordingly. It is not unusual for several similar situations to be considered, effectively allowing the sum total of those events to be used to arrive at an adjustment that is within reason. The first priority is for events that are exactly like the situation cited for reset, with similar events considered when and if exact matches are not available for scrutiny.
While a fair value adjustment is often based on factual information collected to ensure that the adjustment is reasonable and logical, there may also be a degree of subjectivity. The idea is to limit the amount of subjectivity brought to the task and to make efforts to evaluate the available data as objectively as possible. Doing so helps minimize the chances that the fair value adjustment does not truly address the underlying reasons for the disparity between book value and current fair value, while increasing the chances that fair value is more in line with current fair value. current market value.
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