Certified Valuation Analyst (CVA) Practice Exam

Which of the following factors is NOT a part of the fair market value definition?

1. Knowledge of relevant facts

2. Willing buyer

3. Normalization adjustments

4. Control

The correct answer is: Normalization adjustments

Fair market value is traditionally defined as the price at which property would change hands between a willing buyer and a willing seller, both possessing reasonable knowledge of the relevant facts, and neither being under any compulsion to buy or sell. In this context, the presence of a willing buyer and a willing seller is foundational to the concept, as their participation indicates that market forces are at play in determining value. Additionally, the parties involved must have knowledge of all relevant facts, ensuring that the transaction reflects an informed and equitable exchange. Normalization adjustments, however, are specific adjustments made to financial statements or valuation metrics that may be necessary to account for anomalies or non-recurring items, but they do not form a basis of fair market value itself. Normalization is more concerned with presenting an accurate picture of ongoing business performance, rather than defining how value is determined in a transaction between two parties. Therefore, this factor does not fit within the traditional definition of fair market value. Control, in terms of ownership interest, does factor into valuation considerations but pertains more to the economic benefits from ownership rather than to the transaction conditions under which fair market value is established.