What is the relevance of fair value measurement in GAAP?

• A. It is used for predicting future cash flows from operations
• B. It assists in determining the historical cost of assets
• C. It provides a method for valuing assets and liabilities based on market conditions
• D. It simplifies financial statement preparation for small businesses

Answer: (C)

The relevance of fair value measurement in GAAP is primarily centered on the notion that it provides a method for valuing assets and liabilities based on current market conditions. This approach reflects the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. By using fair value measurement, financial statements can give a more accurate and timely representation of a company’s financial position, as asset and liability values can fluctuate based on market dynamics.

This method enhances transparency and comparability for investors and stakeholders, as it aligns the reported values with those observed in the marketplace, thus facilitating more informed decision-making. It is particularly important for financial instruments, investment properties, and other assets where market conditions significantly affect value. Therefore, option C captures the essence of why fair value measurement is significant under GAAP, as it ensures that financial reporting reflects real-time economic realities rather than static historical figures.