ACCA Strategic Business Reporting (SBR) Practice Exam

What is the essence of the asset's fair value measurement?

1. The cost to acquire the asset

2. The price expected in a fair transaction

3. The book value of the asset

4. The net asset value after liabilities

The correct answer is: The price expected in a fair transaction

The essence of an asset's fair value measurement is best captured by the notion of the price expected in a fair transaction between willing parties. Fair value represents a market-based measurement, determined through the price that would be agreed upon in an orderly transaction occurring between market participants at the measurement date. This concept relies on the principle of market efficiency, where the fair value reflects what knowledgeable and willing buyers and sellers would exchange in a competitive marketplace. Fair value is intended to provide a more relevant and realistic appraisal of an asset's current worth compared to historical cost methods, which can become outdated and less reflective of the asset's present market circumstances. The focus on a fair transaction emphasizes that the measurement should not be biased or influenced by other factors, but rather based solely on prevailing market conditions. In contrast, other definitions such as acquisition cost or book value do not capture the current market perspective and often fail to reflect variations in economic conditions or the intrinsic value of an asset. Net asset value after liabilities concerns a broader assessment of a company’s value but does not specifically define the fair value of an individual asset within the market context. By understanding fair value as a price agreed upon in a transaction, financial statements become more relevant and reliable for users making economic decisions.