Deprival value and fair value: a reinterpretation and a reconciliation

Abstract

Measurement is an important current issue for financial accounting standard-setters. Current values are increasingly replacing historical cost measures, but an important unresolved issue is the precise form that current value should take. In this paper two alternative measurement bases that have appeared in accounting standards. Deprivai Value (sometimes called Value to the Business) and Fair Value, are explained and compared. They are then reconciled by making the following three adjustments to their conventional definitions. (1) In the case of Deprival Value, situations in which net realisable value exceeds replacement cost imply that there is a profitable redevelopment or redeployment opportunity, so that net realisable value is regarded as the appropriate measure of Deprivai Value. (2) In the case of Fair Value, transactions costs (including installation and removal costs) are added to acquisition values and deducted from disposal values. (3) In the case of Fair Value, it is assumed that net realisable value represents the ‘highest and best use’, except when it is exceeded by both replacement cost and value in use. In the latter case, ‘highest and best use’ (and therefore Fair Value) is inferred by assuming profit-maximising behaviour by the owner. It is suggested that the resulting synthesis represents a method of current valuation which is consistent with the objective of measuring the asset in terms of the economic opportunities that are available to its current owner in the condition and location in which it is currently to be found.