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Fair value, what is it?
Fair value is a key concept in accounting, finance, and asset valuation that refers to the estimated price at which an asset could be sold or a liability transferred between knowledgeable and willing parties under normal market conditions and without external pressure.
Unlike historical cost, fair value reflects current market conditions. Various valuation methods are used to determine it, which may include available market prices, financial models, comparative analysis, and other technical approaches. This measurement seeks to capture the true economic value of assets and liabilities at a specific point in time.
In practice, fair value is applied to a wide range of financial and non-financial instruments: stocks, bonds, real estate, derivatives, intangible assets, and more. Its use is required or permitted by international accounting standards such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
These standards require certain assets and liabilities to be measured at fair value in the financial statements, particularly when they are subject to significant fluctuations in value or when a faithful representation of an entity's equity and financial risks is required.
Importance of calculating fair value
Fair value measurement is a fundamental practice in modern financial management. Its proper application allows companies to more accurately reflect the economic reality of their assets and liabilities, resulting in multiple strategic benefits:
| Reason | Description |
|---|---|
| Informed decision making | Understanding fair value enables managers, investors, and other stakeholders to make informed financial decisions, especially in investment, financing, mergers, and acquisitions. |
| Financial transparency | Incorporating fair value into financial statements improves the clarity and objectivity of accounting information, generating greater confidence among investors, regulatory authorities, and the market in general. |
| Normative compliance | Accounting standards, both national and international (IFRS and GAAP), require the use of fair value in various contexts. Compliance with these requirements strengthens the integrity and credibility of financial reporting. |
| Performance evaluation | Comparing fair value to historical cost allows you to measure whether an asset has gained or lost value, which is key to evaluating a company's financial and operational performance. |
| Risk management | Understanding the fair value of assets and liabilities helps identify hidden deviations or risks, enabling more proactive management of financial and asset risk. |
GAAP TECHNICAL PROPOSAL: Fair Value Measurement Hierarchy (GAAP)
Within the framework of Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB) establishes a hierarchy for measuring fair value. This structure aims to classify the data sources used in valuation based on their degree of objectivity and verifiability.
The hierarchy is divided into three levels:
| Level | Description |
|---|---|
| Level 1 | Directly observable market data. These correspond to fair values obtained from quoted prices for identical assets or liabilities in active markets. This is the most reliable and objective level. Example: publicly traded stocks. |
| Level 2 | Indirectly observable market data. This applies when identical prices do not exist in active markets, but comparable data exists, such as similar asset prices, interest rates, or yield curves. Example: corporate bonds with similar characteristics to those valued. |
| Level 3 | Unobservable data. Uses internal estimates and financial models due to the lack of reliable market data. This level requires greater accounting judgment and often involves techniques such as discounted cash flow. Example: Valuation of a startup with no direct comparables or solid financial history. |
Important: The hierarchy does not imply that all assets should be valued at Level 1. However, the standard establishes that, when determining fair value, the highest level of available and verifiable input should be used. In practice, it is common for an estimate to be based on a combination of levels, especially for complex or unique assets.
Methods for measuring fair value
| Method | Description | When to use |
|---|---|---|
| market focus | Based on observable prices of comparable assets or liabilities in the market. | When there are recent transactions or active markets for similar goods. |
| income focus | Estimates the present value of the future cash flows that the asset will generate. | When the asset generates predictable future income, especially in intangibles. |
| cost approach | Calculates the replacement or reproduction cost of the asset, adjusted for depreciation. | When there is no active market and the asset does not directly generate income (such as technical machinery). |
NIFBdM B-17, Determination of fair value
The Financial Reporting Standard B-17 (NIF B-17) establishes the accounting framework that must be applied to calculate and disclose the fair value in the financial statements of publicly traded companies, provided that other specific rules so require or permit.
It is important to highlight that NIF B-17 does not determine in which cases fair value should be used, but how it should be measured and presented when its use is already defined by other accounting standards.
This standard provides technical guidelines for valuing assets, liabilities, and other financial instruments under objective and verifiable market criteria. It also establishes the basis for adequately disclosing these valuations, for example, in cases where the fair value net of disposal costs, or other scenarios where it is necessary to report the estimate of a fair value.
In summary, NIF B-17 does not oblige its application by itself, but acts as a technical support tool when other regulations require or permit measurement at fair value. Its main function is to ensure consistency, objectivity and transparency in these assessments.
Importance of NIF B-17: Determination of fair value
The NIF B-17 It is a fundamental standard within the Mexican accounting framework, especially for publicly traded companies. Its importance lies in the following key aspects:
- Clear and consistent guidelines
The standard establishes precise technical guidelines for determining the fair value of assets, liabilities, and financial instruments. This ensures a consistent application of the concept, which strengthens the transparency and comparability of the financial statements. - Normative compliance
NIF B-17 allows companies comply with the disclosure requirements of other accounting standards, providing reliability to the financial information presented to investors, regulators and other users. - Support in decision-making
By establishing a solid basis for calculating fair value, this standard provides users of financial information—such as investors, analysts, and creditors—with more reliable tools to evaluate the performance and financial situation of an entity. - Alignment with international standards
NIF B-17 is harmonized with international guidelines, such as those established by IFRS. This facilitates the comparison between companies at a global level, something crucial in an increasingly interconnected business environment. - Financial and risk management
Accurately understanding fair value allows companies to better manage your risk exposureIt also promotes more informed financial planning, as it is based on current market data rather than historical values.
