Final answer:
The Fair Value Method is an accounting approach to measure and report assets and liabilities based on their estimated market value, used for financial reporting and following GAAP or IFRS guidelines.
Step-by-step explanation:
The Fair Value Method is an accounting approach used to measure and report the value of certain assets and liabilities on the basis of their estimated fair market value. Fair value is defined as 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. Under the Fair Value Method, companies must periodically review and adjust the value of these assets and liabilities to reflect current market conditions. This method is often applied for financial reporting purposes and follows specific guidelines and frameworks such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
An example when the Fair Value Method is used is in the accounting for investments in other companies that do not result in a significant influence or control, categorized as available-for-sale or trading securities. The Fair Value Method involves adjusting the value of these securities on the balance sheet to their current market value at the end of each reporting period, with the resulting gains or losses reported on the income statement.