Fair Value vs Market Value: Are They The Same? (Differences)

In accounting, fair value is quite a popular term. In order to present financial information accurately, we want the data to be recognized as close as possible to their fair value. Sometimes, we hear people use fair value and market value interchangeably. Is it accurate to assume that fair value and market value mean the same? That’s what we will find out in this article.

questioning fair value
Car credit concept. Man dreaming about car

Fair Value: Definition

Fair value is defined as an estimation of the intrinsic value of an asset or liability. This intrinsic value should be determined without any bias in judgment. Take it as an item’s potential value if it were to be sold, traded or exchanged. Since evaluating fair value requires some level of judgment, it can lead to fraud since management can easily manipulate the data and calculations of fair value. 

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Fair Value vs Book Value: [What are the Differences?]

Market Value: Definition

The market dictates the value of an asset when we talk about market value. This means that it’s highly based on supply and demand or sentiment of investors. It doesn’t necessarily reflect something’s true worth.

Fair Value vs Market Value: Are They The Same Or Different?

There are situations where we see the fair value being the same as the market value. It can also be the case that fair value and market value is different. While fair value and market value can really sound like they mean the same thing, in reality, they are not. The table below will demonstrate the differences.

Fair ValueMarket Value
Considered to be the most accurate representation of an asset’s worth. It’s the price an asset should be trading at.Not necessarily represents the true worth of an asset. Traded at estimated prices or negotiated prices.
Determined by methods such as market price, comparable prices of similar assets, discounted cash flow. These are all mathematical calculations that help to get to the most accurate value of an asset.Heavily dependent on investor sentiments or supply and demand. 
Calculates the intrinsic value of an asset based on the asset’s characteristics or fundamentals.Depends on external factors that could change from one day to the other.
Accepted for valuation purposes, especially in accounting (GAAP/IFRS).Not a widely acceptable valuation method since it’s not really relying on any principles.
Fair value can fluctuate and rise or fall but shouldn’t be highly volatile.Market value could make an asset fluctuate in value within the same day and be highly volatile.
Fair value takes into consideration factors such as impairment or any other factors that could impact the value of an asset.Market value is not necessarily logical or taking into consideration all the factors that could affect the value of an asset. It’s mostly dependent on what level a seller and buyer will be willing to trade the asset.

As seen on the table above, there’s quite a few differences between fair value and market value. You may have noticed that fair value is far more reliable and accepted when talking about an asset’s worth. If that’s the case, why is market value even relevant? Well, market value gives a lot of insight on investors’ perceptions about an industry or a company. Ultimately, this information can still be taken into consideration in determining the fair value of an asset. There’s always going to be some level of fair value and market value being intertwined. 

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Fair Value vs Market Value: The Bottom Line

Fair value and market value may sound the same but they are actually quite different. One shouldn’t use these terms interchangeably. Amongst the many differences, the main ones are that fair value represents the intrinsic true worth of an asset whereas market value is more an estimated price based on supply and demand. Market value can easily change during the same day or same hour but fair value should remain the same or fluctuate way less. Whether it’s in accounting, finance or in the valuation industry, knowing the difference between the two terms will be important throughout your career.

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