Differences between market value, fair market value, and fair value

The IVS defines ‘market value’ as:

Market Value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. (IVS 102 p24 A10.01)

The IVS provides that the ‘market value’ of an asset will reflect its highest and best use, which is the use of an asset that ‘maximises its potential and that is possible, legally permissible and financially feasible. The highest and best use may be for continuation of an asset’s existing use or for some alternative use. This is to be determined by the use that a market participant would have in mind for the asset when formulating a price that it would be willing to bid.’ (IVS 102 p25 A10.04)

Many tax laws require the taxpayer to determine the market value which the ATO provides guidance being as ‘the estimated monetary worth of an asset on the open market at a particular time. It is based on:

• the most valuable use of the asset (which may be different to how it is currently used)
• the amount that a willing buyer and seller would agree to in an arm's length transaction^1'

^{[1] https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/market-valuation-of-assets} 

As stated above, ‘fair market value’ holds a longstanding judicial representation in Australia from Spencer v Commonwealth [1907] HCA 82, when Isaacs J described the (fair) market value of an asset to be determined by imagining a willing buyer and willing seller, and asking the highest price the buyer would offer; the seller being taken to accept however much they can get.

In this case, the High Court recognised the principles of:

• the willing but not anxious vendor and purchaser
• a hypothetical market
• the parties being fully informed of the advantages and disadvantages associated with the asset being valued
• both parties being aware of current market conditions.

The distinction between ‘fair market value’ and ‘market value’ is further discerned in common law, with the inclusion of the word ‘fair’ to be interpreted to mean ‘fair, just and equitable in the circumstances’ as stated by Santow J in Holt v Cox [1997] NSWSC 144. 

Santow J stated in that judgement that ‘[i]t would be a mistake to automatically equate “market value”, as distinct from fair market value, with the “real value” which this test is designed to ascertain.” Essentially, fair market value considers a ‘fair market’ whereas market value considers a market that may or may not be operating fairly.

Conversely, in Yelland Security Pty Ltd v Plus Architecture International Pty Ltd [2021] VSC 416, the experts in that matter agreed that ‘there was no material difference between the concepts [market value vs fair market value] for the purposes of their reports’.

In a recent VSC decision, the concept of when a transaction is not market value was explored where the Court found the seller was ‘anxious’ and the market was not ‘fair’. 

Fair value is most commonly adopted as an accounting concept used for financial reporting purposes. 

The IVS defines ‘fair value’ by reference to the International Financial Reporting Standards: 

IFRS 13 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. (IVS 102 p28 A70.01)

However as expressly acknowledged by the IVS, ‘fair value’ has judicial interpretation in different jurisdictions as a basis of value as defined in prior cases. 

Provided below are the extracts of Candoora No. 19 Pty Ltd v Freixenet Australasia Pty Ltd & Anor [2008] VSC 367 from Justice Hargrave regarding the interpretation of ‘fair value’:

• There are a number of cases where the courts have considered the proper approach to the determination of the “fair value” of shares in a company which conducts a business.  The relevant principle arising from the cases is that the valuer must give separate consideration to the word “fair”.  This involves the valuer considering the circumstances of the particular case and, where those circumstances reveal one or more factors which may affect the fairness of a valuation arising from a particular valuation method, determining whether that method should be modified or abandoned in favour of another method (or combination of methods) which is more likely to result in a fair valuation.  There are a broad range of factors which have been identified in the cases as informing the criterion of fairness in the circumstances of those cases.  Of course, each case must depend on its own facts.  However, the cases do provide guidance as to the kinds of factors which may inform fairness in any case.  The fact that a particular factor is of relevance to the criterion of fairness in one case does not mean that it will be relevant in all cases. This is especially so where the terms of the applicable legislation or contract require certain matters to be disregarded in the valuation process.
  
• The issue of fairness in valuing shares in a company has arisen in a variety of contexts.  In some cases, the criterion of fairness is not expressed in the governing legislation, company constitution or contract but is implied in the circumstances of the case.  The cases which have considered the role of fairness as a separate criterion include cases involving compulsory expropriation of shares, selective reductions of capital, pre‑emptive rights arising in a number of different circumstances, compulsory sale or purchase arising from orders made in oppression cases and the power to compulsorily acquire units in a unit trust. 

This judicial interpretation of fair value is most commonly applied in matters involving shareholder oppression, whereby the ‘fair value’ is applied to the (minority) shareholding to compensate the oppressed shareholder for the oppressive conduct.