Fair value is the estimated market price of an asset or liability — what a willing buyer would pay a willing seller in a normal, arm's-length transaction. It represents what something is truly worth in the current market.
For example, if a company owns a piece of land recorded at $1 million (historical cost) but the current market value is $1.5 million, the fair value is $1.5 million.
Fair value accounting (mark-to-market) gives investors a more realistic picture of a company's finances. However, it can increase volatility — asset values fluctuate with market conditions, which directly impacts the balance sheet.