Difference Between Historical Value vs Fair Value
Assets and liabilities are an integral part of any business which tells the financial analyst the strength of the business and how strong the business is to repay its obligations. Assets and liabilities are valued under the IFRS and US GAAP valuation policies. Under US GAAP only cost model is used and under IFRS cost or revaluation model is used. Under the revaluation model, there are few kinds of values in which the asset is valued. One such parameter is Historical Value and Fair Value. In this article, we will try and understand the key differences and working between Historical Value vs Fair Value.
Head to Head Comparison Between Historical Value vs Fair Value (Infographics)
Below is the top 6 difference between Historical Value vs Fair Value
Key differences between Historical Value vs Fair Value
Let us discuss some of the major differences between Historical Value vs Fair Value:
- Fair value is frequently adopted when any asset on the balance sheet is valued. Fair value can be explained as what is the true worth of an asset and the value it should be recorded. Historical Cost, on the contrary, refers to the original value of the asset at the time of acquisition by the company.
- Fair value is not affected by external sources and it is independent in itself as it is the basic intrinsic value of the asset. The historical cost usually bears little or no relationship to the market value after an asset has been held for several years
- Under the fair value method the asset is tested for impairment annually and a loss from the impairment is booked in the income statement of that year. On the other hand, historical value is not adjusted for an impairment loss
- The land is an example of an asset that is generally kept at the historical value of purchase until the land is sold and profit is recorded in the books of accounts. Marketable Securities is an example of an asset.
- The model of fair value is commonly used and it is permitted in both the standards i.e. International Financial Reporting Standards (IFRS) as well as the US General Accepted Accounting Principles (GAAP). Historical value is the less used and is only permitted in US GAAP
- Fair Value accounting method needs constant updating and review as the asset value changes and assets are tested for impairment annually in the company balance sheet. On the other hand, Historical Value of an is permanent and is recorded in the balance sheet at the same amount every year and does not need constant updation and review
Historical Value vs Fair Value Comparison Table
Let’s look at the top 6 Comparison between Historical Value vs Fair Value
|
Historical Value |
Fair Value |
| Historical Value refers to the original price of purchase of the asset | Fair value can be also defined as the intrinsic value of the asset and works on the principal of fundamentals |
| Historical Cost method is not used for all assets as it does not reflect the true picture | Fair value is more commonly adopted and tested method in comparison with any other valuation methodology |
| Historical Value remains stagnant throughout the lifetime of an asset as it is the original cost of the asset | The fair value of an asset fluctuates when compared with any other valuation methodology as it is tested for impairment annually |
| Historical Cost method is only permitted under US GAAP and not in IFRS | Fair value is a measure which is globally acceptable and applied when makes it a more user-friendly method when compared to valuation methods like Historical or Market Value methods |
| Historical Value is often used for intangible assets and Fixed assets. For assets like marketable securities and others, it is not used | Fair value refers to the actual worth of asset which is derived fundamentally and is not determined by the factors of any market forces |
| Historical Value is not tested for impairment loss on the balance sheet | Fair Value is tested for Impairment annually |
Conclusion
A good financial analyst should take care of the valuation methods which is used in different companies and should do necessary adjustments in the financial statements in order to do an apple to apple comparison among different companies. Valuation methodologies should be analyzed critically in order to do better analysis and cross-sectional analysis also. However, an analyst should deep dive into the reason for the adoption of valuation methods for a particular asset.
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