Fair Value: What Your Accountant Wants To Know
Authors: Merryman Andrew 
Published: December 2007

Abstract
One reason for an engineer to estimate the value of oil and gas properties is to prepare an offer to purchase. Another reason is to respond to a request from the accounting department. By reading about selected IRS rulings, SEC rules, and FASB Statements and Concepts, the reader will better understand why the guidelines were adopted and how valuation methods and assumptions can be changed to comply with different guidelines in the United States. This paper is intended to be illustrative in nature and to provide a basis for a common understanding between engineers and accountants. This paper is not intended to be a definitive text. Interpretations of the guidelines and regulations may change and new rules or interpretations may be adopted from time to time. Other regulations and guidelines exist on the country, state, and local levels. They can vary by area and require local expertise.

Introduction
Before discussing the requests of accountants, we need a little background. The Internal Revenue Service (IRS) issues rulings regarding Federal taxes. The Financial Accounting Standards Board (FASB) adopts Statements of Financial Accounting Standards (FASB Statements) that define Generally Accepted Accounting Principles (GAAP) as well as Statements of Concepts (Concepts) that guide accounting practice. The Securities and Exchange Commission (SEC) requires public companies to follow GAAP and additional guidelines from the SEC. As the purpose of the valuation changes, different regulatory guidance becomes applicable. Understanding these differences will allow the engineer to play his or her proper role in maximizing the value of the business.
The first section of this paper discusses definitions, and the statements, and concepts shown below. The next section provides comments on valuation and examples. The third section discusses assumptions in the cash flow projection.FASB 69 Disclosures about Oil and Gas Producing Activities,FASB 141 Business Combinations,FASB 142 Goodwill and Other Intangible AssetsFASB 143 Accounting for Asset Retirement ObligationsFASB 144 Accounting for the Impairment or Disposal of Long-Lived Assets (supersedes FASB 121)FASB Concepts 7 Using Cash Flow Information and Present Value in Accounting Measurements

Definitions, Statements, and Concepts
Definitions
Fair Market Value is defined by the IRS in Estate Tax Regs., Sec. 20.2031–1(b); Revenue Ruling 59–60, 1959–1 C.B. 237 as the price at which the subject asset or business entity would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. There is a stated goal that an estimate of fair market value should reflect the value that could be obtained in the marketplace, rather than value to the current owner.
Fair value is defined in FASB 144, paragraph 22, as the amount at which the asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, that is, other than a forced or liquidation sale.
Definitions
Fair Market Value is defined by the IRS in Estate Tax Regs., Sec. 20.2031–1(b); Revenue Ruling 59–60, 1959–1 C.B. 237 as the price at which the subject asset or business entity would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. There is a stated goal that an estimate of fair market value should reflect the value that could be obtained in the marketplace, rather than value to the current owner.
Fair value is defined in FASB 144, paragraph 22, as the amount at which the asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, that is, other than a forced or liquidation sale.