Fair Market Value

Fair Market Value (FMV) refers to the estimated price at which an asset would be sold in an open and competitive market, where both the buyer and seller act in their own best interests:

• Willing buyer — ready and able to purchase,

• Willing seller — ready and able to sell,

• Both having reasonable knowledge of the asset and market conditions,

• Neither party under pressure or compulsion.

FMV represents the most objective and unbiased estimate of an asset’s value, making it widely used in taxation, financial reporting, accounting, law, and valuation practices.

Key Characteristics of FMV

1. Arm’s Length Transaction

The buyer and seller are independent and unrelated, ensuring a fair and impartial price.

2. Market-Based

FMV reflects actual market conditions, not theoretical or forced prices.

3. Informed Participants

Both parties have access to relevant information (quality, condition, demand, risks, etc.).

4. No Compulsion

The transaction occurs voluntarily—without pressure, distress, or urgency.

Where FMV is Commonly Used

1. Taxation

• Determining taxable value of ESOPs at the time of exercise

• Calculating capital gains on sale of property, shares, or assets

• Valuing assets for inheritance tax, gift tax, or wealth tax

• Transfer pricing and related-party transactions

2. Financial Reporting

• Valuing investments

• Impairment testing

• Purchase price allocation during mergers or acquisitions

3. Legal and Estate Matters

• Divorce settlements

• Bankruptcy proceedings

• Estate distribution and probate

4. Business Valuation

• Start-up valuations

• Fundraising

• Buy-sell agreements among partners

Methods Used to Determine FMV

FMV can be assessed using different approaches:

1. Market Approach

   • Comparing similar assets sold recently

   • Used for real estate, shares, vehicles

2. Income Approach

   • Based on expected future income or cash flows

   • Used for businesses, stocks, rental properties

3. Cost Approach

   • Based on replacement or reproduction cost minus depreciation

   • Used for machinery, equipment, specialized assets

4. Certified Valuers

   • Registered valuers may be required for official purposes

Example

If a piece of land is sold in an area where similar plots have recently sold for ₹50 lakh, then the FMV of that land is approximately ₹50 lakh, assuming both parties agree voluntarily without pressure.

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