Fair Market Value to Fair Value reconciliation in Machinery and Equipment Appraisals

Fair Market Value (“FMV”) is a proposed opinion of value of an asset, supported by sound research and generally accepted valuation methods, that could be received in the market. Whereas Fair Value (“FV”) is the realized value of a piece of equipment upon the actual sale of an asset. In Machinery and Equipment appraisals (“M&E”), fair market value and fair value have a symbiotic relationship and can ultimately be reconciled as one in the same standard of value. To further support that FMV and FV can be interchangeable standards, each must be defined independently and then reconciled.

M&E appraisals tend to be performed for the purpose of collateral documentation, asset backed loans, dissolution of a business, M&A, refinancing, etc. When performing these types of valuations, a market value and some sort of liquidation value are usually presented, with this market value being some version of FMV.

The American Society of Appraisers (“ASA”) machinery, technical, and specialty equipment committee has a range of FMV standards depending on the scope of the appraisal. These different standards include: fair market value, fair market value installed, fair market value removed, fair market value in continued use with an earnings analysis, and fair market value in continued use with assumed earnings. Each definition has its own subtle nuances. For the purpose of this discussion, the following are definitions for FMV as presented by the Internal Revenue Service, the ASA, and Stark Regulations.

Fair market value tends to be used as a standard of value for tax purposes and litigation. The Internal Revenue Service Revenue Ruling 59-60 defines Fair Market Value as:

“[the] price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.”

The American Society of Appraisers Machinery, Technical, and Specialty equipment Committee, in their source book, “Valuing Machinery and Equipment” defines Fair Market Value Installed as:

“the estimated amount, of an installed property expressed in terms of money that may reasonably be expected for an asset in exchange between a willing buyer and a willing seller with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, including installation, as of a specific date. This amount includes all normal direct and indirect costs, such as installation and other assemblage costs, necessary to make the property fully operational.”

When performing medical equipment appraisals, the valuation and standard of value are required to be compliant with Stark Regulations. Stark Regulations 66 Fed. Reg. 856 (2001), 69 Fed. Reg. 16054 (2004) and 72 Fed. Reg. 51081 (2007) as stated in the Federal Register, Final Rule, Stark II, Phase II Regulations, March 26, 2004, defines Fair Market Value as:

“the value in arm’s-length transactions, consistent with the general market value. “General market value” means the price that an asset would bring, as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that considers the volume or value of anticipated or actual referrals.”

FMV assumes that an asset is being used at its highest and best use. The aforementioned definitions recognize that there are distinct levels of trade and measurable marketplaces that generate their own data that contributes towards a conclusion of value. FMV contemplates retail value for the end user and assumes that the assets will continue as part of an operating business or be sold to other end users. This level of trade is affected by market acceptability of the assets, and the current supply, demand, scarcity, and rarity of the subject assets. A normal absorption rate of the assets into the open marketplace is considered when performing an M&E appraisal, as a fire sale of assets that flood the market could have a detrimental outcome on an assets value.

The above presents a solid foundation for the spectrum in which FMV would be applicable. For the purpose of financial reporting, the relevant standard of value is fair value, as defined by U.S. GAAP. ASC 820, Fair Value Measurements and Disclosures defines fair value as:

“the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Nested in this definition are key concepts in which the reconciliation to FMV becomes apparent. These key concepts are:

  • Price: The price used to measure fair value is an exit price considered from the perspective of the market participant (seller) that holds the asset or liability.
  • The asset or liability: Fair value considers the condition and/or location of the asset (or liability). In some cases, the asset or liability stands alone. In other cases, it might be part of a group of assets or liabilities.
  • Transaction: Fair value assumes an orderly transaction that allows time for exposure to the market that is usual and customary and reflects market conditions at the measurement date.
  • Principal market: The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.
  • Market participants: Independent (read: not related parties), knowledgeable, able and willing (read: not forced) buyers and sellers in the principal (read: most advantageous) market.
  • Highest and best use: Fair value refers to the highest and best use of an asset from the perspective of market participants.
  • Premise of value: Refers to an assumption of whether the fair value estimate is based on an “in-use” or “in-exchange” premise, with the appropriate premise being the one that reflects the highest and best use of the asset.

When comparing the presented definitions of FMV and FV, parallels and synergies become apparent, including the parties both being knowledgeable and willing participants, as well as the equipment being utilized at its highest and best use in an on-going business entity. In effect, fair market value, for M&E, is an estimated value and fair value is a realized value in the market. These concepts are not mutually exclusive and without a fair market value in place a fair value cannot be realized. While these standards of value are applied and defined in different financial landscapes, assuming an asset transaction satisfies the criteria of both standards, fair market value is fair value in a machinery and equipment appraisal.