Difference Between Fair Value Versus Historical Cost

Fair Value:

• Accounting Standard defined:

Fair value as the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

• It is meant to represent market value given a sufficiently robust and efficient market. Where no such market exists, the fair value conceptually would be estimated.

• When the fair value estimate is based on a model rather than an actually observed market value, it is called marked to model rather than marked to market.

Historical cost:

     ·  is the amount (price) at which the asset or liability was originally obtained.

     · Where the historical cost is expected to be different from the final value when the item is no longer on the balance sheet, some amortization or depreciation of the value may be called for. This can result in an amortized cost or depreciated cost value. These values are generally more reliably determinable, but less relevant than fair value.

   ·  Also read earlier article on historical cost concept.