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What Is Fair Value Adjustment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2014
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A fair value adjustment is a type of accounting process that makes it possible to reassess the fair value when there is a considerable difference between that figure and the current book value of an asset. Managing this type of adjustment requires taking some time to engage in what is known as revaluing in order to bring the two figures into closer harmony. There are a number of reasons why a fair value adjustment may be necessary, including significant shifts in the market value of the assets involved, or when the assets are involved in a business acquisition.

The exact process of conducting such an adjustment will depend on the type of asset involved and what has occurred to create the wider disparity between the currently identified fair value and the book value of that asset. For example, if the asset involved is a piece of real estate, then the process will require identifying the current market value, based on the increases or decreases in demand for similar properties in the immediate area. This can be compared to both the book value and the current fair market value and taken into account when determining a reasonable and fair amount for the adjustment.

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One of the more common approaches with fair value adjustment relies on identifying a similar event or situation for comparison, then making the adjustment accordingly. It is not unusual for several similar situations to be considered, effectively making it possible to utilize the sum total of those events to arrive at an adjustment that is within reason. First priority goes to events that are exactly like the situation cited for readjustment, with similar events being considered when and if there are no exact matches readily available for scrutiny.

While a fair value adjustment is often based on factual information gathered for purposes of ensuring the adjustment is reasonable and logical, there is also some degree of subjectivity that may be present. The idea is to limit the amount of subjectivity that is brought to the task and make efforts to evaluate the available data with the highest degree of objectivity as possible. Doing so helps to minimize the chances of the fair value adjustment not really addressing the underlying reasons for the disparity between the book value and the current fair value, while also increasing the chances that the fair value is more in line with the current market value.

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croydon
Post 3

It took me a while to get my head around it, but basically fair value just means whatever the thing (whether it is a house, or stock or whatever) is worth on the open market.

And the adjustment is making sure that everyone agrees with that value (after all, it's difficult to really estimate value on the market unless you actually sell the thing).

MrsPramm
Post 2

@Ana1234 - And I think working this way is one of the causes of some kinds of economic crises as well, because if you think about it, if everyone's houses are dropping in value at once, that's a lot of adjustment going on and that shows up in the stock market and everything as well.

On the other hand, everyone is happy when it works in their favor. When you've paid ten dollars for stock, for example and it goes up to $15 that's the same kind of deal.

Ana1234
Post 1

I can imagine a lot of people finding it bitterly ironic that this is called a "fair value adjustment" since it happens quite often when someone buys a house and gets a mortgage for it, then the market falls and the house becomes worth much less than the mortgage.

It is almost never the mortgage which shifts, however and I've even heard of the bank basically taking possession of other things, like cars, to make up the difference.

It might be fair in terms of the market. When it comes to the fact that people end up losing all their money, it doesn't seem fair at all.

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