Fair Value Measurement, 3rd Edition

CHAPTER 7The Market Approach

THE MARKET APPROACH MEASURES the fair value of an entity by using market prices and value indications from actual transactions for the same or similar entities. The most common market approach methods apply earnings multiples or cash flow multiples from market transactions to the earnings or cash flows for the subject entity. Applying the market approach to measure the fair value of an intangible asset is appropriate when market prices or rates for similar intangible assets can be identified.

The market approach is one of the three basic valuation techniques specified for the measurement of fair value by FASB ASC 820, Fair Value Measurement (ASC 820). Additionally, the market approach is often used to measure the fair value of a reporting unit when testing goodwill for impairment under FASB ASC 350, Intangibles—Goodwill and Other. This chapter describes various market approach methods for estimating the fair value of an entity or a reporting unit. The latter part of the chapter also discusses various market approach methods for measuring the fair value of individual intangible assets acquired through mergers and acquisitions, as required by FASB ASC 805, Business Combinations.

According to the FASB:

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. For example, valuation ...