Fair value accounting determines the balance-sheet carrying amount of a financial instrument by reference to its market-based worth. A quoted price may be used when reliable market evidence is available. If the instrument is not traded or no suitable quotation exists, its value is derived indirectly from the cash flows it is expected to generate, typically by converting them into a present value through discounting. The recorded amount is thus based either on an observed market price or on a valuation calculation.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.