An accounting method that is based on the use of fair value (FV); it involves recognizing and measuring an entity’s assets and liabilities at their current market value. Fair value reflects the amount that an asset could be sold for (or that a liability could be settled for) in an orderly transaction between knowledgeable, willing parties (e.g., buyers and sellers), at the measurement date. Fair value is fair to both buyer and seller.

Fair value accounting is a financial reporting approach whereby an entity is required or allowed to measure and report, on an ongoing basis, specific assets and liabilities (generally, financial instruments) at best estimates of the value (i.e., price) it would receive if it were to sell the assets or would pay if it were to transfer the liabilities. Under fair value accounting, entities report gains (fair value gains) when the fair values of their assets increase and/ or that of their liabilities decrease. In the opposite scenario, entities report losses (fair value losses) when the fair values of their assets decrease and/ or that of their liabilities increase.

Under fair value accounting, entities report the fair values of the positions currently held on their balance sheets. Full application of fair value accounting also involves reporting the periodic changes in the fair value of such positions, referred to as unrealized gains and losses, on an entity’s income statement (profit and loss). Unrealized gains and losses arise from new events or conditions or transactions that impact future cash flows and necessitate specific risk adjustments during reporting periods.

Fair value gains increase an entity’s reported entity and may also improve its reported net income, while fair value losses reduce an entity’s reported equity and may also reduce its reported net income.

It is also known as a mark-to-market accounting.