Fair Market Value (FMV)

Posted in Finance, Accounting and Economics Terms, Total Reads: 204

Definition: Fair Market Value (FMV)

Fair market value or FMV is the value of an asset in a completely free and fair market. This fair market value can be said to be the accurate valuation or worth of the asset and is decided by the market forces of supply and demand. At this value, both the purchaser and seller are prepared to exchange the asset.

However, the fair market value assumes a set of conditions which are:

1. Both the buyer and the seller have reasonably good amount of knowledge regarding the asset

2. They are behaving in their own self-interest

3. There is free market competition

4. There is no kind of any undue pressure of trade

Calculating FMV through Supply and Demand of the asset

Fair Market Value (FMV)

Importance of Fair Market Value

Fair market value is important for the market to function smoothly. It ensures the buyers and sellers are involved in a fair exchange of goods and services which makes both parties better off. Fair market value is important primarily in real estate and for taxation. The sale and purchase of assets are based on the FMV. Property taxes are calculated on the FMV of the assets and not on the purchase price or the book value of the asset. There can always be a difference between the book value and the market value of an asset. FSV is also important in Insurance as the claim and recovery is based on the FMV of the asset. The share price of a company is the FMV of the stock based on the market demand of the asset.

Difference Between Fair Market Value & Market Value

Free market Value is different from market value. Market value is only the price of the asset in the market. It does not make necessary the conditions. Similarly, appraised value of an asset is the price that a single appraiser is willing to pay, certainly not the fair market value. FMV differs from the intrinsic value of the asset as the intrinsic value is the value that an individual places on the asset based on the own preferences. There is another concept known as the imposed value which is the value imposed on an asset by an authority. Imposed value may also arise under conditions of monopoly.

Hence, this concludes the definition of Fair Market Value (FMV) along with its overview.

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