01The basis of value comes first
Before a valuer can answer "what is it worth?", they need to know "worth on what basis?". The basis of value defines the hypothetical transaction or measure the valuation represents. Different purposes require different bases, and choosing the wrong one can produce a figure that is precise but irrelevant.
02Market value
Market value is broadly the price that would be agreed between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, with both acting knowledgeably and without compulsion. It reflects a hypothetical typical buyer rather than any particular one. UK tax legislation contains its own statutory definitions of market value, which include specific assumptions for unquoted shares.
03Fair value in articles and agreements
Many articles of association and shareholder agreements require shares to be transferred at "fair value". In that context the term means whatever the document defines it to mean, and often it is defined to exclude a minority discount or to require a pro rata share of the company's value. Where the document is silent, its meaning may need legal interpretation.
04Fair value in financial reporting
Under IFRS 13, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price from the perspective of market participants, not of the entity holding the asset. UK GAAP uses related but not identical concepts.
05Other measures
Several other measures arise regularly:
- Value in use: the present value of cash flows from an asset in its current use, used in impairment testing
- Recoverable amount: the higher of fair value less costs of disposal and value in use
- Investment value or special value: value to a particular owner or buyer, reflecting their own circumstances
- Liquidation or forced-sale value: the price achievable in a constrained sale, which is not the same as market value
This guide is general information, not advice on any particular situation. The correct approach to a valuation depends on its purpose, the basis of value and the facts.
