Fair Value Accounting

Fair Value Accounting

An accounting method that measures assets and liabilities at their current market value rather than historical cost, providing more relevant information about current economic conditions.

For example, an investment firm’s portfolio of marketable securities would be reported at the current market price on the balance sheet date, with unrealized gains or losses reflected in the income statement or other comprehensive income, depending on the classification.

Fair value accounting has expanded in recent decades to provide financial statement users with more timely and relevant information about value fluctuations. It requires significant judgment in determining appropriate valuation techniques, especially for assets without active markets.