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 cost 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