2 - Fair Value Framework (ASC 820)

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

• Exit price

• NOT what it would cost to purchase or replace

• Entity is not forced to sell

• Sale takes place in:

  • Principal market or

  • Most advantageous market

Highest and Best Use

-> What a market participant would likely use the asset for

• In exchange (separately)

• In continued use (value maximization in continued use with other assets)

Transaction costs: Not included

Transportation costs: Included (sometimes, if necessary to get to principal market)

Thought to be specific to the transaction

Greatest volume of activity for the asset or liability

-> Has to have activity and volume

Market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability

-> WOULD BE RECEIVED, not Fair Value!

Market prices for identical assets/liabilities on active markets

• Less active market for identical assets

• Active market for similar assets

• Less activity or no market activity for similar assets but reliable market data/inputs to impute value (e.g., Black Scholes)

Unobservable inputs (anything subjective)

• Recurring measurements (e.g., investment assets for sale)

• Nonrecurring measurements (e.g., goodwill)

• Timing of FV estimates

• Summary by levels

• Tabular presentation summarizing FV measurements separately by level and timing

• Additional disclosures

  • Valuation technique, inputs utilized, transfer between levels (1,2,3)

  • Change in valuation technique (2,3)

  • Valuation process, policies and procedures, quant. information about unobservable inputs (3)

• ASC 320 (marketable securities)

• ASC 805 (business combinations)

• ASC 350 (intangible assets)

• ASC 360 (impairment of long-term assets)

1 - Active vs. inactive market

2 - Valuation technique used

3 - Classification of inputs and measurement in the FV hierarchy