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. It represents the market-based measurement rather than entity-specific value, providing a standardized approach to valuation.
The concept emerged from 20th-century economic theory, particularly the efficient market hypothesis. The formal accounting definition was codified in the early 2000s through international accounting standards, emphasizing market-based rather than cost-based valuations. The term gained prominence after financial crises highlighted the need for transparent asset valuations.
Fair value is like asking what price a willing buyer and willing seller would agree on if they both had perfect information and neither was desperate! It's accounting's attempt to find the 'Goldilocks price' - not too high, not too low, but just right based on what the market would actually pay.
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