16 May 2023
Why, Fair value= Price receivable- Transportation cost( in case of principle market) Fair value= Price Reveivable- Transaction cost- Transportation cost ( in case of most advantageous market) ? Logic behind two different formulas?
09 July 2024
The formulas you've mentioned pertain to the determination of fair value in the context of accounting standards, particularly when assessing whether the sale of goods should be recognized as revenue at fair value. Let's break down the logic behind each formula:
1. **Fair Value in the Principal Market:**
- **Formula:** Fair value = Price receivable - Transportation cost
In the principal market context, fair value is determined based on the price receivable from the sale of goods, reduced by any directly attributable costs of transportation necessary to bring those goods to their current location and condition.
- **Logic:** The rationale here is that in the principal market, the fair value reflects the amount that the entity expects to receive in exchange for the goods after deducting the specific transportation costs related to delivering those goods to the market. This formula ensures that fair value accurately represents the net amount expected from the sale after considering these transportation costs.
2. **Fair Value in the Most Advantageous Market:**
When considering the most advantageous market, fair value is determined based on the price receivable for the goods, reduced by both transaction costs and transportation costs.
- **Logic:** In the context of the most advantageous market, fair value extends beyond the principal market. It takes into account not only transportation costs but also transaction costs incurred in reaching the most advantageous market. Transaction costs include costs directly attributable to the acquisition or disposal of the goods (e.g., commissions, taxes, etc.). By deducting both transaction and transportation costs from the price receivable, the formula ensures that fair value reflects the net amount expected from the sale in the most advantageous market, considering all directly attributable costs.
**Key Differences:**
- **Costs Considered:** The main difference between the two formulas lies in the costs considered: - **Principal Market:** Only transportation costs are deducted because fair value is focused on the specific market where the price receivable is determined. - **Most Advantageous Market:** Both transaction costs and transportation costs are deducted to determine fair value, reflecting the broader consideration of costs in reaching the most advantageous market.
- **Application:** The choice between these formulas depends on the specific circumstances and requirements of determining fair value under accounting standards (such as IFRS or GAAP). The principal market approach is used when a principal market exists, while the most advantageous market approach is applied when a principal market does not exist or when determining fair value in a different market provides more reliable evidence of fair value.
In summary, these formulas ensure that fair value accurately reflects the net amount expected from the sale of goods, considering the applicable costs based on whether the focus is on the principal market or the most advantageous market scenario.
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