How is fair value defined?

How is fair value defined?

• A. The price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.
• B. The original cost of the asset.
• C. The replacement cost of the asset.
• D. The discounted cash flows of the asset's expected benefits.

Answer: (A)

Fair value is a market-based measure: 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 is an exit price reflecting what market participants would pay, under current conditions, using assumptions they would use, and it should ignore the entity’s own intentions or costs. This differs from historical cost (original cost), which is simply what was paid originally; from replacement cost, which is the amount to replace the asset today; and from discounted cash flows of expected benefits (value in use or present value), which are entity-specific estimates not driven by current market prices.

Fair value is a market-based measure: 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 is an exit price reflecting what market participants would pay, under current conditions, using assumptions they would use, and it should ignore the entity’s own intentions or costs.

This differs from historical cost (original cost), which is simply what was paid originally; from replacement cost, which is the amount to replace the asset today; and from discounted cash flows of expected benefits (value in use or present value), which are entity-specific estimates not driven by current market prices.