Fair values are used for financial reporting requirements, asset
allocation, incentive compensation, portfolio construction,
beneficiary transactions, among other purposes. According to Larsen
(2020), due to public market volatility, the expanding uncertainty and
unknown duration, and the ultimate economic impact of COVID-19
creates a situation where it is more difficult to apply judgment in
determining fair value, especially in the midst of the crisis during the
first two quarters of 2020. Although, fair value must be evaluated
constantly and objectively even in a highly subjective and constant
changing environment. Estimating fair value requires significant
informed judgment in the best of times. The current economic
environment requires enhanced consideration of individual facts and
circumstances with a rapidly changing macro overlay. Following
robust established valuation processes, exercising informed judgment
and following the concepts outlined in the AICPA PE/VC Guide, will
help demonstrate the rigor applied and the reasonableness of the
judgments used in estimating fair value at all measurement dates. In
the current environment with increased risk and uncertainty,
investors need more than ever for fair value judgments to be sound.”
On the contrary, I agree with this article because despite the
pandemic fair value has changed over the last several decades.
The impact on the value of a specific investment should reflect a
market participant’s consideration of uncertainty in the macro
environment. It is clear that uncertainty has increased, and therefore
a market participant would take the increased uncertainty and
greater risk into account when determining the amount, they would
pay for an investment. The fair value accounting method lists assets
in their most liquid form. In addition, this provides shareholders with
a better estimate of how much an asset costs based on current prices
instead of constant prices making financial statements more
accurate. Importantly, a fair value measurement does not allow
hindsight and considers information that was known or knowable as
of the measurement date by a market participant.
Reference
Larsen, D. (2020). Measuring Fair Value in Times of Significant
Uncertainty: Valuation Insights First Quarter 2020. Duff &
Phelps. https://www.duffandphelps.com/insights/publications/valua
