How to choose the principal vs most advantageous market?
When a company is determining fair value, they should always use the principal market first to determine the fair value. The principal market is the market with the greatest volume or level of activity for that particular asset or liability. IF there is no principal market, then the company should use the most advantageous market to determine fair value.
The visual below illustrates the 2-step approach to determining what fair value to assign. As you can see, if no principal market exists, then we need to select the most advantageous market. You subtract transaction costs / selling expenses from the quote market price, and then select the market with the highest fair value (excluding selling expenses).
For example, if the company owned land, and they had the following three options, they would always go with the fair value that is the highest, which would be residential development over a manufacturing facility or undeveloped investment.
Back To All Questions
You might also be interested in...
-
What is a market participant?
In order for an asset to be measured at fair value and for there to be an orderly transaction, there has to be a buyer and seller that can be considered a market participant. This is basically saying that buyers and sellers need to unbiased and acting in their own best interest. If your parents...
What is a market participant?
In order for an asset to be measured at fair value and for there to be an orderly transaction, there has to be a buyer and seller that can be considered a market participant. This is basically saying that buyers and sellers need to unbiased and acting in their own best interest. If your parents...
