Gazing into the crystal ball – How contingencies affect a business’s value

Description

Abstract: As part of the definition of “fair market value,” both parties in a transaction must have “reasonable knowledge of the relevant facts.” But a host of contingencies are often among the relevant facts, which means that valuators need to look into the future to arrive at fair market value. Both contingent losses and contingent gains must be considered, and they differ in their accounting treatment. For the valuator, the challenge is to quantify any contingencies and adjust the company’s value accordingly.