What is Fair Value?
Fair value is the **exit price** — the price you would get for selling an asset or paid to transfer a liability in an orderly transaction between market participants.
The Fair Value Hierarchy
U.S. GAAP ranks the inputs used to measure fair value into three levels. The goal is to use the most observable and reliable inputs possible.
Level 1
Highest Priority & Reliability
Quoted prices in **active markets** for **identical** assets or liabilities.
Example: Price of a stock on the NYSE.
Level 2
Observable Inputs
Inputs other than quoted prices that are observable, such as prices for **similar** assets or prices in **inactive markets**.
Example: Value of a corporate bond not actively traded, based on yield curves.
Level 3
Lowest Priority & Reliability
**Unobservable** inputs that reflect the company's own assumptions.
Example: Financial forecasts used to value a private startup company.
Market Finder Calculator
Fair value is based on the **principal market** (most volume). If none exists, it's the **most advantageous market** (best net price). Let's see how it works.
Asset Details
Valuation Techniques
Market Approach
Uses prices from market transactions for identical or comparable items. Best for actively traded assets.
Income Approach
Converts future cash flows or earnings into a single present value. Used for businesses or income-producing assets.
Cost Approach
Measures the cost to replace an asset. Often used for unique items like specialized equipment.
