In the past year or so, the concept of `fair value accounting' has assumed critical importance. It has transcended its previous restricted domains of academic discussion and catapulted itself into high- stakes debates amongst prominent economic and political commentators, politicians, business leaders, industry and professional associations, as they try to unravel its ramifications and role in precipitating the subprime crisis.

The latest edition of International Valuation Standards (IVS 2007) clearly distinguishes Fair Value, as defined in the IFRS, from Market Value, as defined in the IVS:

Fair value requires the assessment of the price that is fair between two specific parties, taking into account, the respective advantages or disadvantages that each will gain from the transaction.

Although market value may also often meet the above criteria, this may not hold good always. Fair value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable in the wider market.

If accounting were to better reflect true economic substance, fair value, rather than historical cost, would generally seem to be the better measure. We compute fair value on the basis of market-specific factors and not those specific to a particular entity. Thus, it indicates a figure that would not be varying across time periods, as well as organizations.

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