What is the main difference between fair value and value in use?
Understand the Problem
The question is asking about the distinction between fair value and value in use, specifically which option correctly identifies their differences. This will involve understanding both definitions and their applications in finance.
Answer
Fair value is the sale price less costs; value in use is present value of future cash flows.
The main difference is that fair value is the sale price of an asset in an open market, less costs to sell, whereas value in use is the present value of future cash flows from an asset in its current condition.
Answer for screen readers
The main difference is that fair value is the sale price of an asset in an open market, less costs to sell, whereas value in use is the present value of future cash flows from an asset in its current condition.
More Information
Fair value indicates the market-based perspective and includes disposal costs, while value in use focuses on the asset's ability to generate cash flow and is not influenced by market fluctuations.
Tips
A common mistake is confusing fair value with fair market value, which are similar but context-dependent.
Sources
- Difference between “value in use” and “fair value less cost to sell” - officetodo.com
- IAS 36 Impairment of Assets - ifrs.org
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