What is meant by "fair value" in accounting?

"Fair value" in accounting refers to the estimated price at which an asset or liability could be bought or sold in an orderly transaction between willing market participants at the measurement date. This definition emphasizes that fair value is market-based, reflecting the assumptions that buyers and sellers would use when determining a price, making it a crucial concept for financial reporting and valuation.

Fair value provides a more relevant measure for financial statements in many cases, as it captures current market conditions and reflects the potential selling price of an asset or the settlement price of a liability. This is particularly important for investors and other stakeholders who rely on financial information to make informed decisions.

In contrast, other definitions such as face value, historical cost, or book value do not adequately capture the current marketplace dynamics and may not reflect an asset's or liability's true economic value in the context of today's market conditions. These measures can also be outdated or not reflective of an asset's current worth or a liability's current settlement amount, thus highlighting the importance of fair value in providing a more accurate and relevant financial picture.