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True and fair value, for accounting purposes, is a value deemed accurate and reasonable by the person who prepared a statement. This term can be used in several contexts, including property valuation for taxes and preparation of audit reports for corporations. There are no hard and fast definitions, although generally accepted accounting practices provide some guidance to accountants who want to prepare reports with a high degree of reliability. Statements may be signed or stamped with an indicator that the value is true and fair, in the opinion of the preparer.
The “true” component of true and fair value refers to the reliability of the information on the statement. It indicates that any numbers quoted are believed to be close to accurate, based on the preparer’s knowledge of the situation. On corporate accounting statements, for example, the numbers are typically rounded for ease of accounting, but they should be generally correct. This includes not just declarations of cash transactions, but also assets.
Fair valuation is based on meeting a series of standards to determine the value of an asset. These ensure that accountants use consistency in the preparation of financial declarations. Some assets are tricky to value because they have no ready equivalents that can be used for comparison. Stocks, for example, are relatively easy to value because they are bought and sold on the open market and people can look at numbers for identical stocks. Real estate is more complex, because there is no identical equivalent to compare it to.
Establishment of true and fair value is important for activities like determining tax liability. Accountants typically want to minimize liability for their clients or employers, using available legal means to do so like claiming reasonable deductions and noting that property depreciates over time. When they declare that statements reflect true and fair value, they stand by the claims made in the statement and believe it is an accurate reflection of account balances and asset holdings.
Standards for accountants can depend on the types of documents they are preparing. Detailed and extensive guidelines are available from professional organizations to encourage accountants to use consistent, fair, and reasonable methods in their work. Consistency is key, as accounts prepared by one accountant should look similar if they are prepared by another accounting professional. If there would be radical differences, one or both is not following accounting standards. Auditors can prepare their own true and fair value estimates to compare with the stated totals on accounting declarations.
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