Fair Value Measurement Techniques

B

The statement in the question is generally true. Fair value is defined as 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.

In measuring fair value, financial reporting frameworks generally require that observable inputs be used to the maximum extent possible, while minimizing the use of unobservable inputs. This is because observable inputs provide reliable and verifiable evidence of fair value, while unobservable inputs are subjective and require judgment and assumptions.

Observable inputs are inputs that reflect market data obtained from independent sources, such as quoted prices in active markets for identical assets or liabilities, or observable inputs from similar assets or liabilities in active markets. Unobservable inputs are inputs that reflect an entity's assumptions about the assumptions that market participants would use in pricing the asset or liability, and are used when observable inputs are not available.

Therefore, financial reporting frameworks generally require that fair value be measured using a hierarchy of inputs, known as the fair value hierarchy. This hierarchy categorizes inputs into three levels, with Level 1 inputs being the most reliable and verifiable, and Level 3 inputs being the least reliable and most subjective.

In summary, fair value techniques should maximize the use of observable inputs, which are the most reliable and verifiable, while minimizing the use of unobservable inputs, which are subjective and require judgment and assumptions. Therefore, the statement in the question is generally true.