What is fair value adjustment?
A fair value adjustment is a type of accounting process that allows fair value to be revalued when there is a significant difference between that value and the current carrying amount of an asset. Managing this type of adjustment requires time to engage in what is known as reassessment to bring the two figures closer together. There are several reasons why a fair value adjustment may be necessary, including significant changes in the fair value of the assets involved, or when the assets are involved in a business acquisition.
The exact process of making a fair value adjustment will depend on the type of asset involved and what has occurred to create a greater disparity between the currently identified fair value and the carrying amount of that asset. For example, if the asset involved is real estate, the process will require identification of the current market value, based on increases or decreases in demand for similar properties in the immediate area. This can be compared to book value and current fair market value and is taken into account in determining a reasonable and fair value for adjustment.
One of the most common approaches to fair value adjustment is based on identifying a similar event or situation for comparison and then adjusting accordingly. It is not uncommon for several similar situations to be considered, effectively allowing the sum total of these events to be used to arrive at a reasonable adjustment. The first priority is for events that are exactly the same as the situation cited for readjustment, with similar events considered when and if no exact matches are available for scrutiny.
While a fair value adjustment is often based on objective information collected to ensure that the adjustment is reasonable and logical, there can also be some degree of subjectivity. The idea is to limit the amount of subjectivity that is brought to the task and to make efforts to assess the available data as objectively as possible. Doing so helps to minimize the chance that the fair value adjustment does not really address the underlying reasons for the disparity between current book value and fair value, while increasing the chance that fair value is more in line with current fair value. . market value.