Which statement best describes the principle of fair value measurement?

The principle of fair value measurement is best described by the notion of considering the price in an orderly transaction between market participants. Fair value reflects the market conditions and the assumption that the asset or liability is exchanged under normal circumstances. Essentially, it represents the amount at which an asset could be bought or sold in a current transaction between willing parties, rather than a forced sale or liquidation.

This approach emphasizes market participant perspectives, including the conditions of the market, which play a crucial role in determining the value. It is more relevant and reflective of the current economic environment, as opposed to historical costs or book values. Fair value measurement focuses on recent market transactions, ensuring that the valuation is aligned with what buyers and sellers would agree upon in an active market setting.

In contrast, other options suggest different valuation bases that do not align with the fair value concept. For instance, historical cost is concerned with what was previously paid rather than the current market conditions. Book value ignores the current market dynamics that could lead to significant disparities between recorded values and fair market values. Lastly, linking to average market prices over multiple periods does not address the present transaction dynamics that fair value seeks to measure. Thus, the consideration of orderly transactions between market participants captures the essence of fair value measurement