Fair value refers to the price determined by buyers and sellers who are familiar with the market conditions under the conditions of fair transactions and voluntarily, or when an asset can be bought and sold by unrelated parties under the conditions of fair transactions. Or the transaction price at which a liability can be paid off.
Fair value measurement assumes that transactions for assets or liabilities occur in the principal market or the most advantageous market. A principal market is the market with the greatest trading volume or the highest level of activity for an asset or liability.
How to determine fair value:
1. Securities are determined based on their current net realizable value (see "Net Realizable Value");
2. Accounts receivable and notes receivable are determined based on the amount expected to be collected in the future, discounted at the actual interest rate at the time, minus estimated bad debt losses and collection costs;
3. Completed products and merchandise Inventory is determined based on the estimated selling price minus realization expenses and reasonable profits;
4. Inventory of work in progress is determined based on the estimated selling price after completion minus the costs to be incurred until completion, The balance after realization expenses and reasonable profits is determined;
5. Raw materials are determined according to the current replacement cost;
6. Fixed assets should be handled according to different situations: for those that can still be continued Used fixed assets are valued at the current replacement cost of fixed assets with similar production capacity, unless it is expected that future use of these assets will produce a lower value for the purchasing enterprise; for those assets that are to be sold or held for a period of time (but not used) Fixed assets that are resold can be valued at net realizable value; fixed assets that are temporarily used for a period of time and then sold are valued at net realizable value after confirming depreciation during the future use period;
7. Identifiable intangible assets such as patent rights, trademark rights, lease rights, and land use rights are valued at assessed value, and goodwill is determined based on the difference between the investment cost of purchasing the enterprise and the recognized fair value;
8 , Other assets, such as natural resources and long-term investments that cannot be traded on the market, are determined based on the assessed value;
9. Accounts payable, notes payable, long-term loans and other liabilities are discounted at the current interest rate based on the amount to be paid in the future. The amount of income is determined;
10. Contingencies and agreed obligations, such as payments caused by unfavorable lease agreements, contract constraints on the enterprise, and upcoming fixed asset liquidation costs, etc., should be fully considered Estimated and valued at the present value of the expected payment discounted at the then actual interest rate.
As long as certain identifiable assets and liabilities belong to the merged enterprise, their fair value must be determined, such as the enterprise's research and development costs, action plan costs, development costs of a certain formula, etc.
11. Determination of the fair value of financial assets with an active market
For financial assets with an active market, the quoted prices in the active market should be used to determine their fair value. Quotes in active markets refer to prices that are easily obtained regularly from exchanges, brokers, industry associations, pricing service agencies, etc., and represent the prices of market transactions that actually occur in normal transactions.
12. Determination of the fair value of financial assets where there is no active market
If there is no active market for financial assets, the enterprise shall use valuation techniques to determine its fair value. The results obtained using valuation techniques should reflect the possible transaction prices in normal transactions on the valuation date. Valuation techniques include reference to prices used in market transactions between parties who are familiar with the situation and willing to transact, reference to the current fair value of other financial assets that are substantially the same, discounted cash flow methods and option pricing models, etc.
Enterprises should choose valuation techniques that are generally recognized by market participants and have proven reliable by actual market transaction prices in the past to determine the fair value of financial instruments.