Which approach uses market transactions to measure fair value?

The market approach is specifically designed to assess fair value by using data from actual market transactions for similar assets or liabilities. This approach considers the prices at which identical or comparable assets have been sold, making it rooted in the principles of supply and demand in the marketplace. By leveraging market transactions, the market approach provides a realistic benchmark for valuation that reflects current market conditions.

In contrast, the cost approach focuses on estimating the value of an asset based on the cost to replace or reproduce it, while the income approach calculates fair value based on the present value of future cash flows expected from the asset. Neither of these methods relies on actual market transactions, which distinguishes the market approach as the only method in this context that utilizes direct market evidence to establish fair value. As such, the market approach is an essential valuation technique in cases where reliable market data is available, ensuring the valuations are aligned with prevailing market conditions.