Fair Value definitions and applications withing SME's

BigFish75

Hi all,

I'm a bit out of touch and whilst trying to research what the correct definition of "Fair Value" as it applies to SME's here in Ireland. In particular I'm interested in how Fair Value is established when one SME acquires another SME either via a share purchase or an asset purchase. How is the "Fair Value" of the acquired tangible assets determined for inclusion in the combined entities new Balance Sheet for future depreciation?

Also, under what curcumstances can an SME restate the "Fair Value" of their assets on their balance sheet? Can only "investments" be restated or can other operating assets which may even have been fully depreciated be revalued to reflect their true economic "fair value"?

Which is the definitive definition of Fair Value applicable to SME's in Ireland. Is it defined by IFRS, Irish GAAP, the Royal Institute of Chartered Surveyors, The International Valuation Standards Council (www.ivsc.org)?

To complicate things further are the definitions of "Fair Value" and "Fair Market Value" interchangeable or not? I know in some countries both are used in different circumstances and they have different definitions.

Hope someone can shed some light on this for me!!!

Cheers

Fish

BenEadir

Fish,

The whole area of how "value" whether Fair Value, Fair Market Value (two very different things), Replacement Value, Orderly Liquidation Value, Forced Liquidation Value or even Scrap Value is defined is up for grabs at the minute.

There are a myriad of "value" definitions by different and sometimes competing standard setting bodies. In the accounting world the International Accounting Standards Body seems to be winning the battle to be global standard setter but you also have orgnanisations such as the International Valuation Standards Council (which you mentioned), the Royal Institute of Chartered Surveyors and others setting valuation standards relevant to their geographic market or field of endeavour. You can even have government bodies setting or imposing the use of a particular standard such as in the US with the Uniform Standard of Professional Appraisal Practice (USPAP), see http://www.appraisalfoundation.org which Congress has authorised to set appraisal standards and appraiser qualifications.

Here in Ireland our accounting standards are set in conjunction with the UK based Accounting Standards Board (see www.frc.org.uk) and in FRS15 they have adopted the UK's Royal Institute of Chartered Surveyors definitions of value which among others include "Existing Use Value" i.e. what an asset is worth to a specific entity at a specific time and "Open Market Value" which is broader and trys to anticipate what an asset would sell for on a pure cash basis between a willing seller and a willing buyer where there had been sufficent time to widely market the asset and neither the seller or the buyer were acting under compulsion i.e. the seller didn't have to sell and the buyer didn't have to buy.

There is a big international move to get all the various national standard setters to converge under the umberella of the International Accounting Standards Board (see www.iasb.org) and the Accounting Standards Board are moving in that direction. The US based Financial Accounting Standards Board recently issued FAS 157 which defines "Fair Value" 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"

I hope this sheds some light on the valuation part of your question. Answers to when tangible assets can be revalued, what standard must be applied and how acquired assets are recorded on the balance sheet of the acquiree need to be answered by one of the accounting experts here.

Regards,

Ben

BigFish75

Thanks Ben your explanation of 'value' and the different definitions etc is helpful. I'm surprised no one here knows (or can be bothered to explain??) how acquired tangible assets are valued for inclusion in the purchasers balance sheet when they are acquired as part of a business purchase along with an undetermined amount of goodwill.

The issue I specifically have is a Ltd company agrees to buy the assets of a competitor for €250,000. The tangible assets of the competitor have a written down book value of just €50,000 so does that mean they must be included in the balance sheeet of the Ltd company purchasing them at €50,000 with goodwill included at €200,000? The owner of the Ltd company believes the tangible assets would cost €175,000 if he had to buy them used in the market place. Can his word be taken for it thus putting the tangible assets on the balance sheet at €175,000 and depreciated over the remainder of their operating life or does the €175,000 figure have to be validated by a qualified valuer giving an independent opinion of value?

Would really appreciate if if someone could shed some light on this for me.

Fish