Which concept deals with the valuation of an asset based on current market price?

The concept that deals with the valuation of an asset based on its current market price is referred to as mark-to-market. This approach values assets by comparing them to the prices at which similar assets are currently trading in the market. This method is particularly important for financial instruments, as it reflects the true economic value of an asset or liability at a particular point in time, as opposed to what it was originally purchased for or any theoretical models of pricing.

Mark-to-market is essential for providing transparency in financial reporting, especially for securities and derivatives, as it helps in assessing the current financial position of an entity accurately. This is crucial for stakeholders, including investors and regulators, as it provides a real-time view of the value of assets held by a company.

While fair value also relates to the current worth of an asset, it encompasses a broader definition that may include estimates of future cash flows, not strictly tied to current market prices. Historical cost reflects the original purchase price of an asset without adjustment for current market conditions, and mark-to-model involves valuation based on theoretical pricing models rather than actual market transactions, making them less reflective of current market conditions compared to mark-to-market.