Fair value method
The fair value method is a tax-timing method that measures a gain or loss from a financial arrangement as the change in its fair value between two points in time. The gain or loss for a particular period is the increase or decrease in its fair value between the beginning and end of the period, adjusted for amounts paid or received during the period.
The term 'fair value' is not a defined term under the tax Acts. However, AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) defines fair value as 'the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction'.
The fair value method can give rise to unrealised gains and losses from financial arrangements being brought to tax.
To be eligible to make the fair value method election in an income year, an entity must meet the common requirements.