Fair value is a market based measurement

The FASB defines Fair Value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a thin line which differentiates Fair value from the concept of Fair market value. While the Fair value is a market based measurement, not an entity based measurement, focused on the seller side of a market based transaction, Fair market value takes into consideration value expectations of both sides, each side acting without compulsion to derive a market value that is satisfactory to both sides.

Fair value measurement became important to financial reporting over the last 20 years. Under fair value accounting, entities are required to measure particular assets and liabilities at their fair values as of the reporting dates. Fair value is the current market based value. This market value is not always directly observable. The goal of this framework is to eliminate the inconsistencies between balance sheet (historical cost) numbers and income statement (fair value) numbers.

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