Fair market value is the price that two parties are willing to pay for an asset or liability, given the following conditions:
- Both parties are well informed about the condition of the asset or liability;
- Neither party is under undue pressure to buy or sell the item; and
- There is no time pressure to complete the deal.
If these conditions are present, the final price established between the parties should reasonably reflect the fair market value of the asset or liability on the date of the transaction. When it is not possible to have such a transaction, it may be possible to estimate fair market value based on a cluster of data points from prior actual market transactions, extrapolated for the asset or liability that is under review.
The fair market value concept is used for many purposes, including the following:
- Establishing the replacement value of an insured asset
- Establishing the tax basis upon which property will be assigned a property tax
- Establishing the basis for damages in a court award