The purpose of measuring fair value is to estimate the price at which an unforced transaction for the sale of the asset or for the transfer of the liability would take place between market participants on the measurement date under current market conditions.

Unforced transaction is one that assumes that the asset has been exposed to the market for a period prior to the measurement date to allow usual and customary marketing activities for transactions involving those assets or liabilities and that the seller is not obliged to sell nor the buyer compelled to buy.

Market participants are the main market buyers and sellers for the asset or liability, which have all of the following characteristics:

• They are independent of each other, that is, they are not related parts;
• They are knowledgeable, having a reasonable understanding of the asset or liability and the transaction;
• They are able to transact with the asset or liability;
• They are interested in performing a transaction with the asset or liability, that is, they are motivated, but not forced to carry it out.

Measurement date is the date on which the assessed asset or liability is transferred to a market participant.

Current market conditions are the conditions prevailing in the market on the measurement date.

Fair value valuations are comparative processes with assets of a similar nature, but are specific to each asset or liability assessed. They consider the particularities such as the markets where the asset/liability can be traded, characteristics of the asset/liability (age, state of conservation, technological update, life span, etc.) and others. These processes use one of three different approaches:

• Market Approach: based on prices and other relevant information obtained from market transactions involving assets, liabilities or group of assets and liabilities identical or similar to the assessed asset/liability;

A typical example is the evaluation of an used vehicle. There are several publications that compile and statistically handle information on a variety of recent transactions involving vehicles of each make, model or year of manufacture. Taking the parameters of the evaluated asset, it comes to its evaluation.

• Cost Approach: also called “replacement cost” or “replacement cost”, it is an approach based on the value that would be needed to replace the asset/liability assessed with another of equal utility.

An example of this approach is when evaluating proprietary software. A survey is made of the number of hours of the different specialists used to design, develop and test the evaluated software and multiplies by the updated costs/hour of these specialists, obtaining the replacement cost of the software. This cost may need to be adjusted according to its possible obsolescence.

• Revenue Approach¹: techniques that measure the asset/liability at the present value (discounted) of expected future values, to be generated by the appraised asset/liability.

An example of this approach is the valuation of a debenture.

The fair value calculation process is complex and detailed and CPC 46 establishes the criteria and restrictions for the application of these approaches.

In English, this approach is called the “income approach”. In our opinion, this denomination describes the method more appropriately.

The NBR 14653-4 (Valuation of assets – Part 4: Enterprises) adopts the similar denomination of income capitalization method.