Final answer:
The GAAP definition of fair value is the hypothetical price to sell an asset or transfer a liability, taking into account market participants' assumptions and risks, within the most relevant market.
Step-by-step explanation:
The GAAP definition of fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. According to GAAP, fair value must be determined through the assumptions that market participants would use in their pricing, including assumptions about risk. The assessment considers whether the transaction is happening in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market.
The valuation techniques used to determine fair value are based on either a market approach, a cost approach, or an income approach. Market participants should be presumed to be knowledgeable, willing to transact, and not compelled to do so. In essence, this definition places a strong emphasis on transactions in real market conditions and with market-driven data to establish the value of assets and liabilities.