What does "fair value" mean in financial reporting?

Fair value in financial reporting refers to the current market value of an asset. It is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. This concept is important in financial reporting because it provides a more accurate representation of an asset's worth based on actual market conditions rather than historical costs or adjustments.

By using fair value, investors and analysts obtain a clearer picture of the economic reality surrounding an asset, which contributes to better decision-making. This approach mitigates the distortion that can occur when relying solely on historical cost, especially in environments where asset values may fluctuate significantly over time.

In contrast, the other options represent different ways of assessing value that do not align with the definition of fair value. The price at which an asset was purchased relates to historical cost, expected future cash flows focus on future performance rather than a current snapshot, and historical value adjusted for inflation does not reflect present market conditions.