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Principal Market vs. Most advantageous Concept


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#1 hgufrin

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Posted 10 September 2014 - 10:21 AM

Hi,

 

I can't wrap my head around this concept. Can you please help with the following question?

 

Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:

 

Front Market Selling Price $52/sh and $6/ sh transaction cost

Side Market Selling Price $50/sh and $1/sh transaction cost

 

 

If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?

 

The answer to the question is $52.

 

My question is: Why isnt it $50? According to the Most Advantageous Market Concept, maximizing amount received would be using the side market. So if you had your choice of the two different markets... why wouldn't it still be $50? Why would you actually choose the Front market considering you will not maximize amount received?

 

Sure hope you can help. Thanks.

 



#2 BluMaine

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Posted 16 September 2014 - 12:44 PM

Even with equal access to both markets, you pick the fair value measurement from the most advantageous market ONLY IF there is no principal market given. The principal market has the greatest volume/level of activity, and it will be the price even if there is a more advantageous price in a different market.