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Topic820.pdf
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U.S.: CPE Courses Offered
820 Fair Value Measurement
CPE Courses Offered Fair Value Measurements
Fair Value Option for Financial Instruments
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Summary of IAS/IFRS and U.S. GAAP
820 Fair Value Measurement
Summary of IAS/IFRS and U.S. GAAP
As a result of the issuance of IFRS 13, differences between U.S. GAAP and IFRSs on fair value measurement
have narrowed so they are very similar. However, certain differences remain. For a discussion of these
differences, see the “10.1. Other Matters –Fair Value Measurement ” section of the publication Comparison
between U.S. GAAP and International Financial Reporting Standards. The following summarizes the significant
differences between Topic 820 and IFRS 13. The information is derived primarily from the Summary section
of ASU No. 2011-04, Fair Value Measurement and the Basis of Conclusions in IFRS 13.
IAS/IFRS IFRS 13 Fair Value Measurement defines fair value, establishes a framework for measuring fair value, and
requires disclosure about fair value measurements. The fair value measurement guidance applies to other
International Accounting Standards and International Financial Reporting Standards (collectively IFRSs) that require or permit fair value measurement (both initial and subsequent measurement) or disclosure about fair
value measurements (with certain exceptions).
U.S. GAAP Topic 820 Fair Value Measurement provides a consistent definition of fair value and how entities should
measure fair value when required to or have elected to use fair value for recognition or disclosure purposes.
Topic 820 Fair Value Measurement defines fair value, establishes a framework for measuring fair value, and requires disclosure about fair value measurements. The fair value measurement guidance applies to other
accounting guidance that requires or permits fair value measurement (both initial and subsequent
measurement) or disclosure about fair value measurements (with certain exceptions).
Summary Discussion
Different assets, liabilities, and equity
instruments are measured at fair
value.
The Boards separately discussed the scope of their respective fair value
measurement standards because of the differences between U.S. GAAP and IFRSs
in the measurement bases specified in other standards for both initial recognition and subsequent measurement. [Topic 820 paragraph BC14; IFRS 13 paragraph
BC19 ]
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There are different accounting
requirements for measuring the fair
value of investments in investment companies.
Topic 946, Financial Services—Investment Companies , requires an investment
company to recognize its underlying investments at fair value at each reporting
period. Topic 820 provides a practical expedient that permits an entity with an investment in an investment company to use as a measure of fair value in specific
circumstances the reported net asset value without adjustment. IFRS 10
Consolidated Financial Statements requires an investment company to
consolidate its controlled underlying investments. Because IFRSs do not have
accounting requirements that are specific to investment companies, the IASB decided that it would be difficult to identify the when such a practical expedient could
be applied given the different practices for calculating net asset values in
jurisdictions around the world. For example, investment companies may report in
accordance with national GAAP, which may have recognition and measurement
requirements that differ from those in IFRSs (i.e., the underlying investments might not be measured at fair value or they might be measured at fair value in accordance
with national GAAP, not IFRSs). [IFRS 13 paragraph BC238(a) ]
There are different requirements for
measuring the fair value of a deposit
liability.
In U.S. GAAP, Topic 825, Financial Instruments , and Topic 942, Financial Services
—Depository and Lending , describe the fair value measurement of a deposit
liability as the amount payable on demand at the reporting date. Paragraph 47 of IFRS 13 states that the fair value measurement of a financial liability with a demand
feature (e.g., demand deposits) cannot be less than the present value of the
amount payable on demand. [IFRS 13 paragraph BC238(b)]
There are different disclosure
requirements.
Because IFRSs generally do not allow net presentation for derivatives, the amounts
disclosed for fair value measurements categorized within Level 3 of the fair value
hierarchy might differ. The Boards are reviewing the presentation requirements for offsetting financial assets and financial liabilities.
IFRSs require a quantitative sensitivity analysis for financial instruments that are
measured at fair value and categorized within Level 3 of the fair value hierarchy.
Topic 820 has different disclosure requirements for nonpublic entities. The FASB
concluded that some of the disclosures should not be required for nonpublic entities because of the characteristics of the users of the financial statements of those
entities. In contrast, the IASB's International Financial Reporting Standard for Small
and Medium-sized Entities addresses the accounting for entities that do not have
public accountability and the disclosures about their fair value measurements. [IFRS
13 paragraph BC238(c) ]
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IAS/IFRS: Scope
10 Overall
Background Some IFRSs require or permit entities to measure or disclose the fair value of assets, liabilities or their own
equity instruments. Because those IFRSs were developed over many years, the requirements for measuring
fair value and for disclosing information about fair value measurements were dispersed and, in many cases,
did not articulate a clear measurement or disclosure objective. Some of those IFRSs contained limited
guidance about how to measure fair value, whereas others contained extensive guidance and that guidance
was not always consistent across those IFRSs that refer to fair value. Inconsistencies in the requirements for
measuring fair value and for disclosing information about fair value measurements contributed to diversity
in practice and reduced the comparability of information reported in financial statements. IFRS 13 remedies
that situation. IFRS 13 is the result of work by the IASB and the FASB to develop common requirements for
measuring fair value and for disclosing information about fair value measurements in accordance with IFRSs
and US generally accepted accounting principles (GAAP).
Scope (IAS/IFRS)
Summary IFRS 13 Fair Value Measurement defines fair value, establishes a framework for measuring fair value, and
requires disclosure about fair value measurements. The fair value measurement guidance applies to other
IFRSs that require or permit fair value measurement (both initial and subsequent measurement) or
disclosure about fair value measurements, except in specified circumstances. IFRS 13 explains how to
measure- and disclose fair value information for financial reporting, but it does not change the types of
assets and liabilities that are required to or are permitted to be measured at fair value or introduce new fair
value measurements or valuation standards.
Limitations: IFRS 13 does not apply to (IFRS 13, paragraph 6 and 7 ):
Share-based payment transactions within the scope of IFRS 2 Share-based Payment (see the 718
Compensation − Stock Compensation chapter);
Leasing transactions within the scope of IAS 17 Leases (see the 840 Leases chapter); and
Measurements that have some similarities to fair value but are not fair value (e.g., net realizable value
in IAS 2 Inventories [see the “10 Overall - Cost Methods-Alternative Methods ” section of the 330
Inventory chapter] or value in use in IAS 36 Impairment of Assets [see the “10 Overall - Recoverability
of Carrying Amounts - General” section of the 360 Property, Plant, and Equipment chapter]).
The disclosure requirements of IFRS 13 are not required for the following:
Plan assets measured at fair value in accordance with IAS 19 Employee Benefits ;
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Retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and
Reporting by Retirement Benefit Plans ; and
Assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36.
An entity that manages a group of financial assets and financial liabilities on the basis of its net exposure to
either market risks or credit risk may apply an exception to IFRS 13 (as an accounting policy decision) for
measuring fair value (see the “10 Overall - Application to Financial Assets and Liabilities with Offsetting
Positions ” section of this chapter).
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.1 - .4, Fair Value Measurement - Objective
13.5 - .8, Fair Value Measurement - Scope
13.48, Fair Value Measurement – Measurement - Application to Financial Assets and Financial
Liabilities with Offsetting Positions in Market Risks or Counterparty Credit Risk
13.BC1 - .BC18, Fair Value Measurement - Basis for Conclusions - Introduction
13.BC19 - .BC26, Fair Value Measurement - Basis for Conclusions - Scope
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Overview
Background
Objective
Scope
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U.S.: Scope
10 Overall
Scope (U.S. GAAP)
Summary Topic 820 Fair Value Measurement defines fair value, establishes a framework for measuring fair value, and
requires disclosure about fair value measurements. The fair value measurement guidance applies to other
accounting guidance that requires or permits fair value measurement (both initial and subsequent
measurement) or disclosure about fair value measurements. It does not:
Apply to accounting guidance that addresses share-based payment transactions (see the 718
Compensation − Stock Compensation chapter, excluding the 40 Employee Stock Ownership Plans
section of that chapter, and the "50 Equity-Based Payments to Non-Employees " section of the 505
Equity chapter);
Eliminate the practicability exceptions to fair value measurements (see paragraph 820-10-15-3 );
Apply measurements that are similar to fair value but that are not intended to measure fair value, for
example, measurements that are based on, or otherwise use, standalone selling price, and inventory
pricing (see the “10 Overall - Cost Methods - Alternative Methods " section of the 330 Inventory
chapter);
Apply to accounting guidance that addresses leasing transactions (see the 840 Leases chapter) (this
exception does not apply to assets acquired and liabilities assumed in a business combination or an
acquisition by a not-for-profit entity that are required to be measured at fair value under Topic 805,
Business Combinations , regardless of whether those assets and liabilities are related to leases);
Apply to the recognition and measurement of revenue from contracts with customers (see the 606
Revenue from Contracts with Customers chapter); or
Apply to the recognition and measurement of gains and losses on the derecognition of nonfinancial
assets (see the “20 Gains and Losses from the Derecognition of Nonfinancial Assets” section of the
610 Other Income chapter).
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The disclosure requirements in paragraphs 820-10-50-1C through 50-8 do not apply to plan assets of a
defined benefit pension or other postretirement plan that are accounted for in accordance with Topic 715.
Instead, the disclosures required in paragraphs 715-20-50-1(d)(iv) and 715-20-50-5(c)(iv) shall apply for
fair value measurements of plan assets of a defined benefit pension or other postretirement plan.
Apply to accounting guidance that addresses share-based payment transactions (including those
described in the 718 Compensation − Stock Compensation chapter, except for the 40 Employee Stock
Ownership Plans section of that chapter,) which is within the scope of this chapter);
Eliminate the practicability exceptions to fair value measurements (see paragraph 820-10-15-3 );
Apply measurements that are similar to fair value but that are not intended to measure fair value, for
example, measurements that are based on, or otherwise use, standalone selling price, and inventory
pricing (see the “10 Overall - Cost Methods - Alternative Methods " section of the 330 Inventory
chapter);
Apply to the recognition and measurement of revenue from contracts with customers (see the 606
Revenue from Contracts with Customers chapter); or Apply to the recognition and measurement of
gains and losses on the derecognition of nonfinancial assets (see the “20 Gains and Losses from the
Derecognition of Nonfinancial Assets” section of the 610 Other Income chapter).
Topic 820 specifies how to measure fair value and disclose fair value information; it does not specify when
entities should measure assets and liabilities at fair value or introduce new fair value measurements.
An entity that manages a group of financial assets and financial liabilities on the basis of its net exposure to
either market risks or credit risk may apply an exception to Topic 820 (as an accounting policy decision) for
measuring fair value (see the “Application to Financial Assets and Liabilities with Offsetting Positions ”
[Effective after the adoption of the amendments in ASU 2016-02 .]
Apply to accounting guidance that addresses share-based payment transactions (see the 718
Compensation − Stock Compensation chapter, excluding the 40 Employee Stock Ownership Plans section of
that chapter, and the "50 Equity-Based Payments to Non-Employees" section of the 505 Equity chapter);
Eliminate the practicability exceptions to fair value measurements (see paragraph 820-10-15-3);
Apply measurements that are similar to fair value but that are not intended to measure fair value, for
example, measurements that are based on, or otherwise use, standalone selling price, and inventory
pricing (see the “10 Overall - Cost Methods - Alternative Methods" section of the 330 Inventory chapter);
Apply to the recognition and measurement of revenue from contracts with customers (see the 606
Revenue from Contracts with Customers chapter); or
Apply to the recognition and measurement of gains and losses on the derecognition of nonfinancial
assets (see the “20 Gains and Losses from the Derecognition of Nonfinancial Assets” section of the 610
Other Income chapter).
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section of this chapter.
See the “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) ”
section of this chapter for a discussion of a practical expedient available to a reporting entity to estimate the
fair value of an investment using the net asset value per share (or its equivalent) of the investment.
U.S. GAAP Literature SEC Staff Views
Remarks by Cheryl K. Tjon-Hing, Quality Fair Value Measurements (December 2006)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
05 Overview and Background, paragraphs 05-1 through 05-1D
15 Scope and Scope Exceptions
Overall Guidance, paragraph 15-1
Other Considerations
Topics and Subtopics Not within Scope, paragraph 15-2
Practicability Exceptions to This Topic, paragraph 15-3
Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent), paragraphs 15-4 through 15-5
20 Glossary
Fair Value
Market Participants
Orderly Transaction
30 Initial Measurement, paragraph 30-1
35 Subsequent Measurement, paragraph 35-1
50 Disclosure - Tabular Format Required, paragraph 50-10
55 Implementation Guidance and Illustrations - Illustrations - Example 6: Restricted Assets -
Case A: Restriction on the Sale of an Equity Instruments, paragraph 55-53
Other Guidance AICPA Audit and Accounting Guide (AAG)
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AVG, Assets Acquired to Be Used in Research and Development Activities – Chapter 1: Valuation
Techniques Used to Measure Fair Value of In-Process Research and Development Assets
AVG, Assets Acquired to Be Used in Research and Development Activities – Chapter 6: Valuation of
In-Process Research and Development Assets
AVG, Testing Goodwill for Impairment – Chapter 1: Concepts and Application of Financial
Accounting Standards Board Accounting Standards Codification 820
AVG, Testing Goodwill for Impairment - Chapter 4: Measuring Fair Value of a Reporting Unit
FASB ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting
FASB ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement
FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Introduction, paragraphs BC1 through BC3
Background Information, paragraphs BC4 through BC13
Scope, paragraphs BC15 through BC18
Accounting Guidance - Overall Amendments, paragraphs BC19 through BC20
Interpretations Derivatives and Hedging - Interpretations of U.S. GAAP
Derivatives and Hedging - Overall (815-10)
Paragraphs 815-10-35-1 through 35-3: Subsequent Measurement - General
815-10-35-1.A: Fair Value Measurement May Give Rise to Temporary Differences
815-10-35-1.B: Fair Value Measurement
Financial Assets and Liabilities - Sales, Transfers, and Extinguishments: Interpretations of U.S.
GAAP
Transfers and Servicing — Sales of Financial Assets (860-20)
Paragraphs 860-20-30-1 through 30-4: Initial Measurement - General
860-20-30-1.A: Fair Value Measurement
Financial Instruments
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Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Overview
Scope
Insights on Fair Value Measurements
Fair value measurements principles under US GAAP
Interpretations of Topic 820, “Fair Value Measurements and Disclosures”
A. Overview and Scope of Topic 820
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Accounting for Compensation Arrangements
Chapter 13: Accounting for Nonemployee Share-Based Payment Awards
Paragraphs 13.13
Chapter 13: Accounting for Nonemployee Share-Based Payment Awards, Improvements to
Nonemployee Share-Based Payment Award Accounting (ASU 2018-07), paragraphs 13.37 – 13.39
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IAS/IFRS: Definition of Fair Value
Definition of Fair Value (IAS/IFRS)
Summary Fair value is defined by IFRS 13 Fair Value Measurement 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.”
Fair value is a market-based measurement and not an entity-specific measurement. A fair value
measurement requires assumptions (including assumptions about risk) that market participants would use.
Market approach is defined as a “valuation technique that uses prices and other relevant information
generated by market transactions involving identical or comparable (ie similar) assets, liabilities or a group
of assets and liabilities, such as a business (IFRS 13, Appendix A .)” The valuation of the asset is dependent
on market information and is not affected by the entity that owns the asset or holds the liability.
Proper identification of market participants is a key concept underlying the measurement under the market
approach (see the “10 Overall - Market Participants ” section of this chapter).
The Fair Value Measurement Approach
The objective of a fair value measurement is to determine the price that would be received to sell an asset or
paid to transfer a liability at the measurement date. A fair value measurement requires an entity to
determine:
The particular asset or liability that is the subject of the measurement, consistently with its unit of
account (see the “10 Overall - The Asset or Liability ” section of this chapter). Unit of account is
defined as the “level at which an asset or a liability is aggregated or disaggregated in an IFRS for
recognition purposes (Appendix A).
For a nonfinancial asset, the valuation premise that is appropriate for the measurement, consistently
with its highest and best use (see the “10 Overall - Application to Non-Financial Assets ” section of
this chapter). (Highest and best use is the use that would maximize the value of the non-financial
asset or the group of assets and liabilities.)
The principal (or most advantageous) market for the asset or liability (see the 10 Overall - The
Transaction ” section of this chapter). The principal market is the one with greatest volume and
activity related to the asset or liability and the most advantageous is the amount that would be received
after considering the most advantageous transaction and delivery costs.
The valuation technique(s) appropriate for the measurement, considering the availability of data with
which to develop inputs that represent the assumptions that market participants would use in pricing
the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.
(See the “10 Overall - Valuation Techniques ” section of this chapter for a discussion of
measurement methods in IFRS 13 as well as detailed guidance on the definition the fair value hierarchy
which determines the classification of each asset and liability measured at fair value in the levels 1, 2
and 3.)
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IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.1 - .4, Fair Value Measurement - Objective
13.9 - .10, Fair Value Measurement - Measurement - Definition of Fair Value
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.B2, Fair Value Measurement - Appendix B: Application Guidance - The Fair Value Measurement
Approach
13.BC27 - .BC45, Fair Value Measurement - Basis for Conclusions - Measurement - Definition of Fair
Value
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Objective
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U.S.: Definition of Fair Value
Definition of Fair Value (U.S. GAAP)
Summary Fair value is defined by Topic 820 Fair Value Measurement 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.” Fair value is a market-based measurement and not an entity-specific measurement. A fair value
measurement requires assumptions (including assumptions about risk) that market participants would use.
Market approach is defined as a “valuation technique that uses prices and other relevant information
generated by market transactions involving identical or comparable (that is, similar) assets, liabilities or a
group of assets and liabilities, such as a business.” The valuation of the asset is dependent on market
information and is not affected by the entity that owns the asset or holds the liability.
Proper identification of market participants is a key concept underlying the measurement under the market
approach (see the “10 Overall - Market Participants ” section of this chapter).
The Fair Value Measurement Approach
The objective of a fair value measurement is to determine the price that would be received to sell an asset or
paid to transfer a liability at the measurement date. A fair value measurement requires an entity to
determine:
The particular asset or liability that is the subject of the measurement, consistently with its unit of
account (see the “10 Overall - The Asset or Liability ” section of this chapter). Unit of account is
defined as the “level at which an asset or a liability is aggregated or disaggregated in U.S. GAAP for
recognition purposes.
For a nonfinancial asset, the valuation premise that is appropriate for the measurement, consistently
with its highest and best use (see the “10 Overall - Application to Nonfinancial Assets ” section of
this chapter). (Highest and best use is the use that would maximize the value of the non-financial
asset or the group of assets and liabilities.)
The principal (or most advantageous) market for the asset or liability (see the 10 Overall - The
Transaction ” section of this chapter). The principal market is the one with greatest volume and
activity related to the asset or liability and the most advantageous is the amount that would be received
after considering the most advantageous transaction and delivery costs.
The valuation technique(s) appropriate for the measurement, considering the availability of data with
which to develop inputs that represent the assumptions that market participants would use in pricing
the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.
(See the “10 Overall - Valuation Techniques ” section of this chapter for a discussion of
measurement methods in Topic 820 as well as detailed guidance on the definition the fair value
hierarchy which determines the classification of each asset and liability measured at fair value in the
levels 1, 2 and 3.)
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U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
05 Overview and Background, paragraphs 05-1 through 05-1D
20 Glossary
35 Subsequent Measurement - Definition of Fair Value, paragraph 35-2
55 Implementation Guidance and Illustrations - Implementation Guidance - The Fair Value
Measurement Approach, paragraphs 55-1 through 55-2
Other Guidance FASB ASU No. 2020-03, Codification Improvements to Financial Instruments
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
A. Overview and Scope of Topic 820
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Definition and Key Concepts
Definition and Key Concepts - Objective of Fair Value Measurement
Application Guidance
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IAS/IFRS: The Asset or Liability
The Asset or Liability (IAS/IFRS)
Summary A fair value measurement is for a particular asset or liability and should consider the characteristics of the
asset or liability (e.g., the condition and location of the asset and any restrictions on its sale or use) if market
participants would consider those characteristics when pricing the asset or liability at the measurement
date. The asset or liability measured at fair value might be: (a) a standalone asset or liability (e.g., a financial
instrument or a nonfinancial asset); or (b) a group of assets, a group of liabilities, or a group of assets and
liabilities (e.g., a reporting unit or a business) depending on the unit of account.
The unit of account determines what is being measured by reference to the level at which the asset or liability
is aggregated (or disaggregated) for recognition purposes. The unit of account for the asset or liability should
be determined in accordance with the provisions of other accounting guidance that requires or permits fair
value measurement. The unit of account is determined by the way the asset or liability is recognized in the
financial statements. For example, this would generally be an individual financial instrument such as a
derivative or loan and in other cases it may be a group of related assets or liabilities such as a business or
reporting unit.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.11 - .14, Fair Value Measurement - Measurement - The Asset or Liability
13.A, Fair Value Measurement - Appendix A: Defined Terms - Unit of Account
13.IE27, Fair Value Measurement - Illustrative Examples - Restricted Assets
13.IE28, Example 8: Restriction on the Sale of an Equity Instrument
13.IE29, Example 9: Restrictions on the Use of an Asset
13.BC.46 - .BC47, Fair Value Measurement - Basis for Conclusions - Measurement - The Asset or
Liability
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - The Asset or Liability
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U.S.: The Asset or Liability
The Asset or Liability (U.S. GAAP)
Summary A fair value measurement is for a particular asset or liability and should consider the characteristics of the
asset or liability (e.g., the condition and location of the asset and any restrictions on its sale or use) if market
participants would consider those characteristics when pricing the asset or liability at the measurement
date. The asset or liability measured at fair value might be: (a) a standalone asset or liability (e.g., a financial
instrument or a nonfinancial asset); or (b) a group of assets, a group of liabilities, or a group of assets and
liabilities (e.g., a reporting unit or a business) depending on the unit of account.
The unit of account determines what is being measured by reference to the level at which the asset or liability
is aggregated (or disaggregated) for recognition purposes. The unit of account for the asset or liability should
be determined in accordance with the provisions of other accounting guidance that requires or permits fair
value measurement. The unit of account is determined by the way the asset or liability is recognized in the
financial statements. For example, this would generally be an individual financial instrument such as a
derivative or loan and in other cases it may be a group of related assets or liabilities such as a business or
reporting unit.
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary - Unit of Account
35 Subsequent Measurement - Definition of Fair Value - The Asset or Liability, paragraphs 35-2B
through 35-2E
55 Implementation Guidance and Illustrations - Illustrations - Example 6: Restricted Assets,
paragraph 55-51
Case A: Restriction on the Sale of an Equity Instrument, paragraphs 55-52 through 55-53
Case B: Restrictions on the Use of an Asset, paragraphs 55-54 through 54-55
Interpretations Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Definition and Key Concepts - The Specific Asset or Liability
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IAS/IFRS: The Transaction
The Transaction (IAS/IFRS)
Summary According to Topic 820 Fair Value Measurement , a fair value measurement “assumes that the asset or
liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the
liability at the measurement date under current market conditions.” An orderly transaction is defined as a
transaction that “assumes exposure to the market for a period before the measurement date to allow for
marketing activities that are usual and customary for transactions involving such assets or liabilities; it is
not a forced transaction (eg a forced liquidation or distress sale).”
A fair value measurement assumes that the transaction takes place in the principal market (the market with
the greatest volume and level of activity), or if none, in the most advantageous market (the market that
maximizes the amount received to sell an asset or minimizes the amount paid to transfer the liability) for the
asset or liability. The normal market in which the entity would enter into a transaction is presumed to be the
principal market, or if none, the most advantageous market. The fair value measurement of the asset or
liability is the price in the principal market (even if the price in a different market is more advantageous).
An entity must have access to the principal (or most advantageous) market. The principal (or most
advantageous) market for the same asset or liability might be different for different entities (and businesses
within those entities). For example, similar assets held by entities in different countries may have different
markets that are accessible to them, resulting in different fair values assigned to similar assets. Therefore,
the principal (or most advantageous) market (and thus, market participants) should be considered from the
perspective of the entity.
In the absence of an observable market, a fair value measurement assumes that a transaction occurs on
measurement date considered from the perspective of a market participant that holds the asset or owes the
liability. That assumed transaction sets the basis for estimating the price to sell or to transfer the liability.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.15 - .21, Fair Value Measurement - Measurement - The Transaction
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.BC48 - .BC54, Fair Value Measurement - Basis for Conclusions - Measurement - The Transaction
13.IE19 - .IE22, Fair Value Measurement - Illustrative Examples - Principal (or Most Advantageous)
Market - Example 6: Level 1 Principal (or Most Advantageous) Market
13.IE24 - .IE26, Fair Value Measurement - Illustrative Examples – Transaction Prices and Fair Value
at Initial Recognition – Example 7 – Interest Rate Swap at Initial Recognition
Interpretations
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International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - The Transaction
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U.S.: The Transaction
The Transaction (U.S. GAAP)
Summary According to Topic 820 Fair Value Measurement , a fair value measurement “assumes that the asset or
liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the
liability at the measurement date under current market conditions.” An orderly transaction is a transaction
that “assumes exposure to the market for a period before the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced
transaction (for example, a forced liquidation or distress sale).”
A fair value measurement assumes that the transaction takes place in the principal market (the market with
the greatest volume and level of activity), or if none, in the most advantageous market (the market that
maximizes the amount receive to sell an asset or minimizes the amount paid to transfer the liability) for the
asset or liability. The normal market in which the reporting entity would enter into a transaction is presumed
to be the principal market, or if none, the most advantageous market. The fair value measurement of the
asset or liability is the price in the principal market (even if the price in a different market is more
advantageous).
A reporting entity must have access to the principal (or most advantageous) market. The principal (or most
advantageous) market for the same asset or liability might be different for different entities (and businesses
within those entities). For example, similar assets held by entities in different countries may have different
markets that are accessible to them, resulting in different fair values assigned to similar assets. Therefore,
the principal (or most advantageous) market (and thus, market participants) should be considered from the
perspective of the reporting entity.
In the absence of an observable market, a fair value measurement assumes that a transaction occurs on
measurement date considered from the perspective of a market participant that holds the asset or owes the
liability. That assumed transaction sets the basis for estimating the price to sell or to transfer the liability.
U.S. GAAP Literature SEC Staff Views
Remarks by Evan Sussholz, Market Participant Assumptions (December 2009)
[Effective after the adoption of the amendments in ASU 2022-03.]
Although a reporting entity must be able to access the market, the reporting entity does not need to be able
to sell the particular asset or transfer the particular liability on the measurement date to be able to measure
fair value on the basis of the price in that market. For example, an equity security that an entity cannot sell
on the measurement date because of a contractual sale restriction shall be measured at fair value on the
basis of the price in the principal (or most advantageous) market. A contractual sale restriction does not
change the market in which that equity security would be sold.
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Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Most Advantageous Market
Principal Market
Transaction Costs
35 Subsequent Measurement - Definition of Fair Value - The Transaction, paragraphs 35-3
through 35-6C
55 Implementation Guidance and Illustrations - Illustrations - Example 4: Level 1 Principal (or
Most Advantageous) Market, paragraphs 55-42 through 55-45A
55 Implementation Guidance and Illustrations - Illustrations - Example 5: Transaction Prices and
Initial Fair Value at Initial Recognition - Interest Rate Swap at Initial Recognition, paragraphs 55-
46 through 55-49
Other Guidance FASB ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions
FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Principal (or Most Advantageous) Market, paragraphs BC21 through BC24
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
A. Overview and Scope of Topic 820
A-17. What is the meaning of a “principal (or most advantageous) market” and what is its
importance?
A-18. How does the principal (or most advantageous) market affect determination of fair value
and what are the implications for fair value measurement under Topic 820?
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
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Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Definition and Key Concepts - Orderly Transaction
Definition and Key Concepts - The Principal (or Most Advantageous) Market
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IAS/IFRS: Market Participants
Market Participants (IAS/IFRS)
Summary Market participants are buyers and sellers in the principal (or most advantageous) market (see the “10
Overall - The Transaction ” section of this chapter) for the asset or liability that are:
Independent of each other (i.e., they are not related parties - see the “10 Overall - Definition of
Related Parties ” section of the 850 Related Party Disclosures chapter);
Knowledgeable (i.e., sufficiently informed to make an investment decision and are presumed to be as
knowledgeable as the reporting entity about the asset or liability);
Able to enter into a transaction for the asset or liability; and
Willing to enter into a transaction for the asset or liability.
The fair value of the asset or liability is determined based on the assumptions that market participants would
use in pricing the asset or liability. The entity should identify characteristics that distinguish market
participants generally, considering factors specific to:
The asset or liability;
The principal (or most advantageous) market for the asset or liability; and
Market participants with whom the entity would enter into a transaction in that market.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.22 - .23, Fair Value Measurement - Measurement - Market Participants
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.BC.55 - .BC59, Fair Value Measurement - Basis for Conclusions - Measurement - Market
Participants
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Market Participants and the Price
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U.S.: Market Participants
Market Participants (U.S. GAAP)
Summary Market participants are buyers and sellers in the principal (or most advantageous) market (see the “10
Overall - The Transaction ” section of this chapter) for the asset or liability that are:
Independent of each other (i.e., they are not related parties - see the “10 Overall - Definition of
Related Parties ” section of the 850 Related Party Disclosures chapter);
Knowledgeable (i.e., sufficiently informed to make an investment decision and are presumed to be as
knowledgeable as the reporting entity about the asset or liability);
Able to enter into a transaction for the asset or liability; and
Willing to enter into a transaction for the asset or liability.
The fair value of the asset or liability is determined based on the assumptions that market participants would
use in pricing the asset or liability. The entity should identify characteristics that distinguish market
participants generally, considering factors specific to:
The asset or liability;
The principal (or most advantageous) market for the asset or liability; and
Market participants with whom the reporting entity would enter into a transaction in that market.
U.S. GAAP Literature SEC Staff Views
Remarks by Kris Shirley, Identifying Principal or Most Advantageous Market (December 2015)
Remarks by Evan Sussholz, Market Participant Assumptions (December 2009)
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Market Participants
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35 Subsequent Measurement - Definition of Fair Value - Market Participants, paragraph 35-9
Other Guidance FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Market Participants, paragraphs BC25 through BC26
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
A. Overview and Scope of Topic 820
A-16. What Is a Market Participant and What Is Its Significance?
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Definition and Key Concepts - Market Participants
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IAS/IFRS: The Price
The Price (IAS/IFRS)
Summary Paragraph 24 of IFRS 13 Fair Value Measurement states that fair value is “the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous)
market at the measurement date under current market conditions (i.e., an exit price) regardless of whether
that price is directly observable or estimated using another valuation technique.”
The price should not be adjusted for transaction costs. Transaction costs are those costs to sell an asset or
transfer a liability in the principal (or most advantageous) market. Transaction costs are accounted for in
accordance with other guidance.
Transport costs are those costs that would be incurred to transport an asset from its current location to its
principal (or most advantageous) market, and are not transaction costs. The price should be adjusted for the
costs to transport the asset from its current location to that market.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.24 - .26, Fair Value Measurement - Measurement - The Price
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.BC.60 - .BC62, Fair Value Measurement - Basis for Conclusions - Measurement - The Price
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Market Participants and the Price
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U.S.: The Price
The Price (U.S. GAAP)
Summary Paragraph 820-10-35-9A of Topic 820 Fair Value Measurement states that fair value is “the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or
most advantageous) market at the measurement date under current market conditions (i.e., an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique.”
The price should not be adjusted for transaction costs. Transaction costs are those costs to sell an asset or
transfer a liability in the principal (or most advantageous) market. Transaction costs are accounted for in
accordance with other guidance.
Transport costs are those costs that would be incurred to transport an asset from its current location to its
principal (or most advantageous) market, and are not transaction costs. The price should be adjusted for the
costs to transport the asset from its current location to that market.
U.S. GAAP Literature SEC Staff Views
Remarks by Kris Shirley, Use of Cost Basis as Fair Value (December 2015)
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Entry Price
Exit Price
Orderly Transaction
Transaction Costs
Transportation Costs
35 Subsequent Measurement - Definition of Fair Value - The Price, paragraphs 35-9A through 35-
9C
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Interpretations Interpretations of Topic 820, “Fair Value Measurement”
A. Overview and Scope of Topic 820
A-19. What are Transaction Costs and Transportation Costs As They Relate to the Price Used to
Measure the Dair Value of an Asset or a Liability?
A-20. How Should Transaction Costs and Transportation Costs Be Used in Determining Fair
Value?
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Definition and Key Concepts - The Price
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IAS/IFRS: Application to Nonfinancial Assets
Application to Nonfinancial Assets (IAS/IFRS)
Summary Highest and Best Use
According to paragraph 27 of IFRS 13 Fair Value Measurement, a fair value measurement of a non-financial
asset considers “a market participant’s ability to generate economic benefits by using the asset in its highest
and best use or by selling it to another market participant that would use the asset in its highest and best
use.”
The highest and best use of a non-financial asset considers the use of the asset that is: (a) physically
possible; (b) legally permissible; and (c) financially feasible, as follows:
A use that is physically possible considers the physical characteristics of the asset that market
participants would consider when pricing the asset (e.g., the location or size of a property).
A use that is legally permissible considers any legal restrictions on the use of the asset that market
participants would consider when pricing the asset (e.g., the zoning regulations applicable to a
property).
A use that is financially feasible considers whether a use of the asset that is physically possible and
legally permissible generates adequate income or cash flows (considering the costs of converting the
asset to that use) to produce an investment return that market participants would require from an
investment in that asset put to that use.
Highest and best use is determined from the perspective of market participants. An entity’s current use of a
non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a
different use by market participants would maximize the value of the asset.
An acquired non-financial asset may not be used actively or it may not be used according to its highest and
best use (e.g., an acquired intangible asset that the entity plans to use defensively by preventing others from
using it). Nevertheless, the entity should measure the fair value of a non-financial asset assuming its highest
and best use by market participants.
Valuation Premise for Non-Financial Assets
Paragraphs 31 and 32 of IFRS 13 describe the valuation premise concept for non-financial assets as follows:
31 The highest and best use of a non-financial asset establishes the valuation premise used to measure
the fair value of the asset, as follows:
(a) The highest and best use of a non-financial asset might provide maximum value to market
participants through its use in combination with other assets as a group (as installed or otherwise
configured for use) or in combination with other assets and liabilities (eg a business).
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(i) If the highest and best use of the asset is to use the asset in combination with other assets or
with other assets and liabilities, the fair value of the asset is the price that would be received in a
current transaction to sell the asset assuming that the asset would be used with other assets or
with other assets and liabilities and that those assets and liabilities (ie its complementary assets
and the associated liabilities) would be available to market participants.
(ii) Liabilities associated with the asset and with the complementary assets include liabilities that
fund working capital, but do not include liabilities used to fund assets other than those within the
group of assets.
(iii) Assumptions about the highest and best use of a non-financial asset shall be consistent for all
the assets (for which highest and best use is relevant) of the group of assets or the group of assets
and liabilities within which the asset would be used.
(b) The highest and best use of a non-financial asset might provide maximum value to market
participants on a stand-alone basis. If the highest and best use of the asset is to use it on a stand-
alone basis, the fair value of the asset is the price that would be received in a current transaction to sell
the asset to market participants that would use the asset on a stand-alone basis.
32 The fair value measurement of a non-financial asset assumes that the asset is sold consistently with
the unit of account specified in other IFRSs (which may be an individual asset). That is the case even when
that fair value measurement assumes that the highest and best use of the asset is to use it in combination
with other assets or with other assets and liabilities because a fair value measurement assumes that the
market participant already holds the complementary assets and the associated liabilities.
Paragraph B3 of IFRS 13 describes the application of the valuation premise concept for non-financial
assets.
B3 When measuring the fair value of a non-financial asset used in combination with other assets as a
group (as installed or otherwise configured for use) or in combination with other assets and liabilities (eg
a business), the effect of the valuation premise depends on the circumstances. For example:
(a) the fair value of the asset might be the same whether the asset is used on a stand-alone basis or in
combination with other assets or with other assets and liabilities. That might be the case if the asset is
a business that market participants would continue to operate. In that case, the transaction would
involve valuing the business in its entirety. The use of the assets as a group in an ongoing business
would generate synergies that would be available to market participants (ie market participant
synergies that, therefore, should affect the fair value of the asset on either a stand-alone basis or in
combination with other assets or with other assets and liabilities).
(b) an asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the fair value measurement through adjustments to the value of the asset used on a
stand-alone basis. That might be the case if the asset is a machine and the fair value measurement is
determined using an observed price for a similar machine (not installed or otherwise configured for
use), adjusted for transport and installation costs so that the fair value measurement reflects the
current condition and location of the machine (installed and configured for use).
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(c) an asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the fair value measurement through the market participant assumptions used to
measure the fair value of the asset. For example, if the asset is work in progress inventory that is
unique and market participants would convert the inventory into finished goods, the fair value of the
inventory would assume that market participants have acquired or would acquire any specialised
machinery necessary to convert the inventory into finished goods.
(d) an asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the valuation technique used to measure the fair value of the asset. That might be
the case when using the multi-period excess earnings method to measure the fair value of an
intangible asset because that valuation technique specifically takes into account the contribution of
any complementary assets and the associated liabilities in the group in which such an intangible asset
would be used.
(e) in more limited situations, when an entity uses an asset within a group of assets, the entity might
measure the asset at an amount that approximates its fair value when allocating the fair value of the
asset group to the individual assets of the group. That might be the case if the valuation involves real
property and the fair value of improved property (ie an asset group) is allocated to its component
assets (such as land and improvements).
The excess earning method referenced in B3 above is one of the income approach methods for valuing assets
where there is no active market price discussed in IFRS 13. The excess earnings valuation method assumes
the entity's earnings are generated by assets. Where the entity’s earnings are greater than would be expected
to be earned on its tangible assets, the entity is presumed to have excess earnings created by intangible
assets such as customer lists, patents, licenses and goodwill. The valuation methodology is to identify and
value tangible assets and value intangible assets by capitalizing excess earnings associated with those
intangible assets. Specific guidance on how to apply the multiple earnings method is not provided in IFRS 13
but is covered extensively in valuation literature and in practice by valuation specialists.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.27 - .33, Fair Value Measurement - Measurement - Application to Non-financial Assets
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.B3, Fair Value Measurement - Appendix B: Application Guidance - Valuation Premise for Non-
financial Assets
13.BC63 - .BC79, Fair Value Measurement - Basis for Conclusions - Measurement - Application to
Non-financial Assets
13.IE2, Fair Value Measurement - Illustrative Examples - Highest and Best Use and Valuation
Premise
13.IE3 - .IE6, Fair Value Measurement - Illustrative Examples - Highest and Best Use and Valuation
Premise - Example 1: Asset Group
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13.IE7 - .IE8, Fair Value Measurement - Illustrative Examples - Highest and Best Use and Valuation
Premise - Example 2: Land
13.IE9, Fair Value Measurement - Illustrative Examples - Highest and Best Use and Valuation
Premise - Example 3: Research and Development Project
13.IE11- .IE 14, Fair Value Measurement - Illustrative Examples – Use of Multiple Valuation
Techniques - Example 4: Machine Held and Used
13.IE15 - .IE 17, Fair Value Measurement - Illustrative Examples - Use of Multiple Valuation
Techniques - Example 5: Software Asset
13.IE27, Fair Value Measurement - Illustrative Examples - Restricted Assets
13.IE29, Fair Value Measurement - Illustrative Examples - Restricted Assets - Example 9:
Restrictions on the Use of an Asset
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Application to Non-Financial Assets
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U.S.: Application to Nonfinancial Assets
Application to Nonfinancial Assets (U.S. GAAP)
Summary Highest and Best Use
According to paragraph 820-10-35-10B of Topic 820 Fair Value Measurement, a fair value measurement of
a non-financial asset considers “a market participant’s ability to generate economic benefits by using the
asset in its highest and best use or by selling it to another market participant that would use the asset in its
highest and best use.”
The highest and best use of a non-financial asset considers the use of the asset that is: (a) physically
possible; (b) legally permissible; and (c) financially feasible, as follows:
A use that is physically possible considers the physical characteristics of the asset that market
participants would consider when pricing the asset (e.g., the location or size of a property).
A use that is legally permissible considers any legal restrictions on the use of the asset that market
participants would consider when pricing the asset (e.g., the zoning regulations applicable to a
property).
A use that is financially feasible considers whether a use of the asset that is physically possible and
legally permissible generates adequate income or cash flows (considering the costs of converting the
asset to that use) to produce an investment return that market participants would require from an
investment in that asset put to that use.
Highest and best use is determined from the perspective of market participants. A reporting entity’s current
use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest
that a different use by market participants would maximize the value of the asset.
An acquired non-financial asset may not be used actively or it may not be used according to its highest and
best use (e.g., an acquired intangible asset that the entity plans to use defensively by preventing others from
using it). Nevertheless, the reporting entity should measure the fair value of a non-financial asset assuming
its highest and best use by market participants.
Valuation Premise for Non-Financial Assets
Paragraphs 820-10-35-10E and 35-11A of Topic 820 describe the valuation premise concept for non-
financial assets.
820-10-35-10E The highest and best use of a non-financial asset establishes the valuation premise used
to measure the fair value of the asset, as follows:
a. The highest and best use of a non-financial asset might provide maximum value to market
participants through its use in combination with other assets as a group (as installed or otherwise
configured for use) or in combination with other assets and liabilities (for example, a business).
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1. If the highest and best use of the asset is to use the asset in combination with other assets or
with other assets and liabilities, the fair value of the asset is the price that would be received in a
current transaction to sell the asset assuming that the asset would be used with other assets or
with other assets and liabilities and that those assets and liabilities (that is, its complementary
assets and the associated liabilities) would be available to market participants.
2. Liabilities associated with the asset and with the complementary assets include liabilities that
fund working capital, but do not include liabilities used to fund assets other than those within the
group of assets.
3. Assumptions about the highest and best use of a non-financial asset shall be consistent for all of
the assets (for which highest and best use is relevant) of the group of assets or the group of assets
and liabilities within which the asset would be used.
b. The highest and best use of a non-financial asset might provide maximum value to market
participants on a stand-alone basis. If the highest and best use of the asset is to use it on a stand-
alone basis, the fair value of the asset is the price that would be received in a current transaction to sell
the asset to market participants that would use the asset on a stand-alone basis.
820-10-35-11A The fair value measurement of a non-financial asset assumes that the asset is sold
consistently with the unit of account specified in other Topics (which may be an individual asset). That is
the case even when that fair value measurement assumes that the highest and best use of the asset is to
use it in combination with other assets or with other assets and liabilities because a fair value
measurement assumes that the market participant already holds the complementary assets and
associated liabilities.
Paragraph 820-10-55-3 of Topic 820 describes the application of the valuation premise concept for non-
financial assets.
820-10-55-3 When measuring the fair value of a non-financial asset used in combination with other
assets as a group (as installed or otherwise configured for use) or in combination with other assets and
liabilities (for example, a business), the effect of the valuation premise depends on the circumstances.
For example:
a. The fair value of the asset might be the same whether the asset is used on a stand-alone basis or in
combination with other assets or with other assets and liabilities. That might be the case if the asset is
a business that market participants would continue to operate. In that case, the transaction would
involve valuing the business in its entirety. The use of the assets as a group in an ongoing business
would generate synergies that would be available to market participants (that is, market participant
synergies that, therefore, should affect the fair value of the asset on either a stand-alone basis or in
combination with other assets or with other assets and liabilities).
b. An asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the fair value measurement through adjustments to the value of the asset used on a
stand-alone basis. That might be the case if the asset is a machine and the fair value measurement is
determined using an observed price for a similar machine (not installed or otherwise configured for
use), adjusted for transportation and installation costs so that the fair value measurement reflects the
current condition and location of the machine (installed and configured for use).
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c. An asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the fair value measurement through the market participant assumptions used to
measure the fair value of the asset. For example, if the asset is work-in-process inventory that is
unique and market participants would convert the inventory into finished goods, the fair value of the
inventory would assume that market participants have acquired or would acquire any specialized
machinery necessary to convert the inventory into finished goods.
d. An asset’s use in combination with other assets or with other assets and liabilities might be
incorporated into the valuation technique used to measure the fair value of the asset. That might be
the case when using the multi-period excess earnings method to measure the fair value of an
intangible asset because that valuation technique specifically takes into account the contribution of
any complementary assets and the associated liabilities in the group in which such an intangible asset
would be used.
e. In more limited situations, when a reporting entity uses an asset within a group of assets, the
reporting entity might measure the asset at an amount that approximates its fair value when
allocating the fair value of the asset group to the individual assets of the group. That might be the case
if the valuation involves real property and the fair value of improved property (that is, an asset group)
is allocated to its component assets (such as land and improvements).
The excess earning method referenced in paragraph 820-10-55-3 above is one of the income approach
methods for valuing assets where there is no active market price. The excess earnings valuation method
assumes the entity's earnings are generated by assets. Where the entity’s earnings are greater than would be
expected to be earned on its tangible assets, the entity is presumed to have excess earnings created by
intangible assets such as customer lists, patents, licenses and goodwill. The valuation methodology is to
identify and value tangible assets and value intangible assets by capitalizing excess earnings associated with
those intangible assets. Specific guidance on how to apply the multiple earnings method is not provided in
Topic 820 but is covered extensively in valuation literature and in practice by valuation specialists.
U.S. GAAP Literature SEC Staff Views
Remarks by Evan Sussholz, Market Participant Assumptions (December 2009)
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
Remarks by Cheryl K. Tjon-Hing, Exclusion of Tax Amortization Benefits (December 2006)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Financial Asset
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Financial Liability
Highest and Best Use
Nonperformance Risk
35 Subsequent Measurement - Definition of Fair Value - Application to Nonfinancial Assets
Highest and Best Use for Nonfinancial Assets, paragraphs 35-10A through 35-10D
Valuation Premise for Nonfinancial Assets, paragraphs 35-10E through 35-14
55 Implementation Guidance and Illustrations - Implementation Guidance – The Fair Value
Measurement Approach - Valuation Premise for Nonfinancial Assets, paragraph 55-3
55 Implementation Guidance and Illustrations - Illustrations
Example 1: Highest and Best Use and Valuation Premise, paragraph 55-25
Case A: Asset Group, paragraphs 55-26 through 55-29
Case B: Land, paragraphs 55-30 through 55-31
Case C: In-Process Research and Development Project, paragraph 55-32
Example 3: Use of Multiple Valuation Techniques, paragraph 55-35
Case A: Machine Held and Used, paragraphs 55-36 through 55-38A
Case B: Software Asset, paragraphs 55-39 through 55-41
Example 6: Restricted Assets, paragraph 55-51
Case B: Restrictions on Use of Asset, paragraphs 55-54 through 55-55
Other Guidance FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Removing the Terms In Use and In Exchange, paragraphs BC27 through BC29
Applicability of Highest and Best Use and Valuation Premise, paragraphs BC45 through BC49
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
C-2. What is The "Highest and Best Use" Concept?
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C-3. Why is The Highest and Best Use Concept Key to Valuing Nonfinancial Assets in
Combination with Other Assets or with Other Assets and Liabilities?
C-4.What is The Meaning of "Legally Permissible" in Assessing Highest and Best Use?
C-5. What are Examples of Potential Complexities Related to Determining Highest and Best Use?
C-6. How Do Restrictions on The Sale or Use of Assets Affect Fair Value Measurement?
C-7. What Types of Valuation Approaches Might Be Used To Measure Fair Value Within The Fair
Value Hierarchy?
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance – Grouping Financial Assets and Liabilities
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IAS/IFRS: Application to Liabilities and an Entity’s Own Equity Instruments
Application to Liabilities and an Entity’s Own Equity Instruments (IAS/IFRS)
Summary General principles
A financial or non-financial liability or an entity’s own equity instrument (e.g., equity interests issued as
consideration in a business combination) is assumed to be transferred to a market participant at the
measurement date. This principal applies to a liability or equity under the assumption that they will continue
to be held by the market participant and not extinguished or cancelled on the measurement date (IFRS 13,
paragraph 34 ).
Even when there is no observable market to provide pricing information about the transfer of a liability or an
entity’s own equity instrument (e.g., because contractual or other legal restrictions prevent the transfer of
such items), there might be an observable market for such items if they are held by other parties as assets
(e.g., a corporate bond or a call option on an entity’s shares). In all cases, an entity should maximize the use
of relevant observable inputs and minimize the use of unobservable inputs to meet the objective of a fair
value measurement.
Liabilities and Equity Instruments Held by Other Parties as Assets
An entity should measure the fair value of the liability or equity instrument from the perspective of a market
participant that holds the identical item as an asset at the measurement date when a quoted price for the
transfer of an identical or a similar liability or entity’s own equity instrument is not available and if the
identical item is held by another party as an asset.
The fair value of the liability or equity instrument should be measured as follows:
Using the quoted price in an active market for the identical item held by another party as an asset, if
that price is available;
Using other observable inputs, such as the quoted price in a market that is not active for the identical
item held by another party as an asset; or
Using another valuation technique, such as: (a) an income approach; or (b) a market approach. These
methods of estimating fair value are described in detail in IFRS 13 Appendix B .
If there are factors specific to the asset that are not applicable to the fair value measurement of the liability
or equity instrument, an entity should adjust the quoted price of a liability or an entity’s own equity
instrument held by another party as an asset. The price of the asset should not reflect the effect of a
restriction preventing the sale of that asset. Factors that may indicate that the quoted price of the asset
should be adjusted include the following:
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The quoted price for the asset relates to a similar (but not identical) liability or equity instrument held
by another party as an asset. For example, the liability or equity instrument may have a particular
characteristic (e.g., the credit quality of the issuer) that is different from that reflected in the fair value
of the similar liability or equity instrument held as an asset.
The unit of account for the asset is not the same as for the liability or equity instrument. For example,
for liabilities, the price for an asset may reflect a combined price for a package comprising both the
amounts due from the issuer and a third-party credit enhancement. If the unit of account for the
liability is not for the combined package, the objective is to measure the fair value of the issuer’s
liability, not the fair value of the combined package. The entity would therefore adjust the observed
price for the asset to exclude the effect of the third-party credit enhancement.
Liabilities and Equity Instruments Not Held by Other Parties as Assets
An entity should measure the fair value of the liability or equity instrument using a valuation technique from
the perspective of a market participant that owes the liability or has issued the claim on equity when a quoted
price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available
and the identical item is not held by another party as an asset.
For example, when applying a present value technique an entity might take into account either of the
following: (a) the future cash outflows that a market participant would expect to incur in fulfilling the
obligation, including the compensation that a market participant would require for taking on the obligation;
or (b) the amount that a market participant would receive to enter into or issue an identical liability or equity
instrument, using the assumptions that market participants would use when pricing the identical item (e.g.,
having the same credit characteristics) in the principal (or most advantageous) market for issuing a liability
or an equity instrument with the same contractual terms.
Non-Performance Risk
The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes, but
may not be limited to, an entity’s own credit risk. Non-performance risk is assumed to be the same before
and after the transfer of the liability.
An entity should consider the effect of its credit risk (credit standing) and any other factors that might
influence the likelihood that the obligation will or will not be fulfilled when measuring the fair value of a
liability.
The fair value of a liability reflects the effect of non-performance risk on the basis of its unit of account. The
issuer of a liability issued with an inseparable third-party credit enhancement that is accounted for
separately from the liability should not include the effect of the credit enhancement (e.g., a third-party
guarantee of debt) in the fair value measurement of the liability. The issuer’s own credit standing should be
considered and not that of the third party guarantor when measuring the fair value of the liability if the credit
enhancement is accounted for separately from the liability.
Restriction Preventing the Transfer of a Liability or an Entity’s Own Equity Instrument
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An entity should not include a separate input or an adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the item when measuring the fair value of a liability or an entity’s
own equity instrument.
Financial Liability with a Demand Feature
The fair value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the
amount payable on demand, discounted from the first date that the amount could be required to be paid.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.34 - .41, Fair Value Measurement - Measurement - Application to Liabilities and an Entity’s Own
Equity Instruments - General Principles
13.42 - .44, Fair Value Measurement - Measurement - Application to Liabilities and an Entity’s Own
Equity Instruments - Non-Performance Risk
13.45 - .46, Fair Value Measurement - Measurement - Application to Liabilities and an Entity’s Own
Equity Instruments - Restriction Preventing the Transfer of a Liability or an Entity’s Own Equity
Instrument
13.47, Fair Value Measurement - Measurement - Application to Liabilities and an Entity’s Own
Equity Instruments - Financial Liability with a Demand Feature
13.61 - .66, Fair Value Measurement - Measurement – Valuation Techniques
13.B31 - .B33, Fair Value Measurement - Appendix B: Application Guidance - Applying Present Value
Techniques to Liabilities and an Entity’s Own Equity Instruments Not Held by Other Parties as Assets
13.BC80 - .BCZ103, Fair Value Measurement - Basis for Conclusions - Measurement - Application to
Liabilities
13.BC104 - .BC107, Fair Value Measurement - Basis for Conclusions - Measurement - Application to
an Entity’s Own Equity Instruments
13.IE30 - .IE33, Fair Value Measurement - Illustrative Examples - Measuring Liabilities
13.IE34, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example 10:
Structured Note
13.IE35 - .IE39, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example
11: Decommissioning Liability
13.IE40 - .IE42, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example
12: Debt Obligation - Quoted Price
13.IE43 - .IE47, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example
13: Debt Obligation - Present Value Technique
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13.IE48 - .IE58, Fair Value Measurement - Illustrative Examples – Measuring Fair Value when the
Volume or Level of Activity for and Asset or a Liability has Significantly Decreased - Example 14:
Estimating a Market Rate of Return when the Volume or level of Activity for an asset has Significantly
Decreased
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Application to Liabilities and an Entity’s Own Equity Instruments
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U.S.: Application to Liabilities and an Entity’s Own Equity Instruments
Application to Liabilities and an Entity’s Own Equity Instruments (U.S. GAAP)
Summary General principles
A financial or non-financial liability or a reporting entity’s own equity instrument (e.g., equity interests
issued as consideration in a business combination) is assumed to be transferred to a market participant at
the measurement date. This principal applies to a liability or equity under the assumption that they will
continue to be held by the market participant and not extinguished or cancelled on the measurement date.
Even when there is no observable market to provide pricing information about the transfer of a liability or a
reporting entity’s own equity instrument (e.g., because contractual or other legal restrictions prevent the
transfer of such items), there might be an observable market for such items if they are held by other parties
as assets (e.g., a corporate bond or a call option on an entity’s shares). In all cases, an entity should
maximize the use of relevant observable inputs and minimize the use of unobservable inputs to meet the
objective of a fair value measurement.
Liabilities and Equity Instruments Held by Other Parties as Assets
A reporting entity should measure the fair value of the liability or equity instrument from the perspective of
a market participant that holds the identical item as an asset at the measurement date when a quoted price
for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and if
the identical item is held by another party as an asset.
The fair value of the liability or equity instrument should be measured as follows:
Using the quoted price in an active market for the identical item held by another party as an asset, if
that price is available;
Using other observable inputs, such as the quoted price in a market that is not active for the identical
item held by another party as an asset; or
Using another valuation approach, such as: (a) an income approach; or (b) a market approach.
When measuring the fair value of a liability or an equity instrument held by another party as an asset, a
reporting entity should adjust the quoted price of the asset only if there are factors specific to the asset that
are not applicable to the fair value measurement of the liability or equity instrument. When the asset held by
another party includes a characteristic restricting its sale (see ASC paragraphs 820-10-35-6B and 820-10-
35-36B ), the fair value of the corresponding liability or equity instrument also would include the effect of
the restriction. Some factors that may indicate that the quoted price of the asset should be adjusted include
the following:
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The quoted price for the asset relates to a similar (but not identical) liability or equity instrument held
by another party as an asset. For example, the liability or equity instrument may have a particular
characteristic (e.g., the credit quality of the issuer) that is different from that reflected in the fair value
of the similar liability or equity instrument held as an asset.
The unit of account for the asset is not the same as for the liability or equity instrument. For example,
for liabilities, the price for an asset may reflect a combined price for a package comprising both the
amounts due from the issuer and a third-party credit enhancement. If the unit of account for the
liability is not for the combined package, the objective is to measure the fair value of the issuer’s
liability, not the fair value of the combined package. The entity would therefore adjust the observed
price for the asset to exclude the effect of the third-party credit enhancement.
Liabilities and Equity Instruments Not Held by Other Parties as Assets
An entity should measure the fair value of the liability or equity instrument using a valuation technique from
the perspective of a market participant that owes the liability or has issued the claim on equity when a quoted
price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available
and the identical item is not held by another party as an asset.
For example, when applying a present value technique an entity might take into account either of the
following: (a) the future cash outflows that a market participant would expect to incur in fulfilling the
obligation, including the compensation that a market participant would require for taking on the obligation;
or (b) the amount that a market participant would receive to enter into or issue an identical liability or equity
instrument, using the assumptions that market participants would use when pricing the identical item (e.g.,
having the same credit characteristics) in the principal (or most advantageous) market for issuing a liability
or an equity instrument with the same contractual terms.
Non-Performance Risk
The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes, but
may not be limited to, an entity’s own credit risk. Non-performance risk is assumed to be the same before
and after the transfer of the liability.
An entity should consider the effect of its credit risk (credit standing) and any other factors that might
influence the likelihood that the obligation will or will not be fulfilled when measuring the fair value of a
liability.
The fair value of a liability reflects the effect of non-performance risk on the basis of its unit of account. The
issuer of a liability issued with an inseparable third-party credit enhancement that is accounted for
separately from the liability should not include the effect of the credit enhancement (e.g., a third-party
guarantee of debt) in the fair value measurement of the liability. The issuer’s own credit standing should be
considered and not that of the third party guarantor when measuring the fair value of the liability if the credit
enhancement is accounted for separately from the liability.
Restriction Preventing the Transfer of a Liability or an Entity’s Own Equity Instrument
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An entity should not include a separate input or an adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the item when measuring the fair value of a liability or an entity’s
own equity instrument.
Fair Value of Deposit Liabilities
The fair value of a deposit liability with no defined maturity is the amount payable on demand at the
reporting date.
U.S. GAAP Literature SEC Staff Views
SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers, PCAOB Forums on
Auditing in the Small Business Environment, Craig Olinger, Deputy Chief Accountant, Division of
Corporation Finance (December2012) – Equity Transactions, page 25
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
35 Subsequent Measurement - Definition of Fair Value - Application to Liabilities and Instruments
Classified in a Reporting Entity’s Shareholder’s Equity
General Principles, paragraphs 35-16 through 35-16L
Nonperformance Risk, paragraphs 35-17 through 35-18A
Restriction Preventing the Transfer of a Liability or an Instrument Classified in a Reporting
Entity’s Shareholders’ Equity, paragraphs 35-18B through 35-18C
35 Subsequent Measurement – Valuation Techniques - General Principles, paragraphs 35-24
through 35-27
55 Implementation Guidance and Illustrations - Illustrations
Example 7: Measuring Liabilities, paragraphs 55-55A through 55-56
Case A: Liabilities and Credit Risk - General, paragraphs 55-57 through 55-57A
Case B: Structured Note, paragraphs 55-58 through 55-59
Case C: Asset Retirement Obligation, paragraphs 55-77 through 55-81
Case D: Debt Obligation - Quoted Price, paragraphs 55-82 through 55-84
Case E: Debt Obligation - Present Value Technique, paragraphs 55-85 through 55-89
Example 8: Measuring Fair Value When the Volume or Level of Activity for an Asset or a
Liability Has Significantly Decreased, paragraphs 55-90 through 55-98
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825, Financial Instruments, 10 Overall, 25 Recognition - Fair Value Option - Overall Guidance - Unit
of Accounting, paragraph 25-13
942, Financial Services - Depository and Lending, 470 Debt, 50 Disclosure - Fair Value of Deposit
Liabilities, paragraph 50-1
Other Guidance FASB ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions
ASU No. 2018-09, Codification Improvements
ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Application to Liabilities, paragraphs BC30 through BC40
Measuring the Fair Value of Instruments Classified in a Reporting Entity’s Shareholders’ Equity,
paragraphs BC41 through BC44
Interpretations Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance – Application to Liabilities and Instruments Classified in Shareholders’
Equity
Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
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IAS/IFRS: Application to Financial Assets and Liabilities with Offsetting Positions
Application to Financial Assets and Liabilities with Offsetting Positions (IAS/IFRS)
Summary An entity that holds a group of financial assets and financial liabilities is exposed to market risks and to the
credit risk of each of the counterparties. An entity that manages that group of financial assets and financial
liabilities (within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial
Instruments(July 2014) ) on the basis of its net exposure to either market risks or credit risk may apply, as
an accounting policy decision, an exception to IFRS 13 Fair Value Measurement for measuring fair value.
That exception permits an entity to measure the fair value of a group of financial assets and financial
liabilities on the basis of the price that would be received to sell a net long position (i.e., an asset) for a
particular risk exposure or to transfer a net short position (i.e., a liability) for a particular risk exposure in an
orderly transaction between market participants at the measurement date under current market conditions.
An entity should measure the fair value of the group of financial assets and financial liabilities consistently
with how market participants would price the net risk exposure at the measurement date.
The use of the exception discussed above is permitted only if the entity does all the following:
Manages the group of financial assets and financial liabilities on the basis of the entity’s net exposure
to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance
with the entity’s documented risk management or investment strategy;
Provides information on that basis about the group of financial assets and financial liabilities to the
entity’s key management personnel, as defined in IAS 24 Related Party Disclosures ; and
Measures those financial assets and financial liabilities at fair value in the statement of financial
position at the end of each reporting period.
The exception does not pertain to financial statement presentation. The basis for the presentation of
financial instruments in the statement of financial position may differ from the basis for the measurement
of financial instruments. In such cases an entity may need to allocate the portfolio-level adjustments to the
individual assets or liabilities that make up the group of financial assets and financial liabilities managed on
the basis of the entity’s net risk exposure. An entity should perform such allocations on a reasonable and
consistent basis using a methodology appropriate in the circumstances.
An accounting policy decision should be made to use the exception (see the “10 Overall – Accounting
Changes ” section of the 250 Accounting Changes and Error Corrections chapter).
The exception applies only to financial assets, financial liabilities and other contracts within the scope of IAS
39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments (July 2014). The
references to financial assets and financial liabilities is this section should be read as applying to all
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contracts within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, regardless of whether
they meet the definitions of financial assets or financial liabilities in IAS 32 Financial Instruments: Presentation
.
Disclosure
An entity must disclose the accounting policy decision to use the exception described above.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.48 - .56, Fair Value Measurement - Measurement - Application to Financial Assets and Liabilities
with Offsetting Positions in Market Risks or Counterparty Risk
13.96, Fair Value Measurement - Disclosure
13.BC108 - .BC131, Fair Value Measurement - Basis for Conclusions - Measurement - Application to
Financial Assets and Financial Liabilities with Offsetting Positions in Market Risks or Counterparty
Credit Risk
7, Financial Instruments: Disclosures – Appendix A: Defined Terms - Market Risk
7, Financial Instruments: Disclosures – Appendix A: Defined Terms - Credit Risk
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Application to Financial Assets and Financial Liabilities with Offsetting
Positions in Market Risks or Counterparty Credit Risk
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U.S.: Application to Financial Assets and Liabilities with Offsetting Positions
Application to Financial Assets and Liabilities with Offsetting Positions (U.S. GAAP)
Summary A reporting entity that holds a group of financial assets, financial liabilities, nonfinancial items accounted
for as derivatives in accordance with Topic 815, or combinations of these items, is exposed to market risks
and to the credit risk of each of the counterparties. An entity that manages that group of financial assets,
financial liabilities, nonfinancial items accounted for as derivatives in accordance with Topic 815, or
combinations of these items on the basis of its net exposure to either market risks or credit risk may apply,
as an accounting policy decision, an exception to Topic 820 Fair Value Measurement for measuring fair value.
That exception permits a reporting entity to measure the fair value of a group of financial assets, financial
liabilities, nonfinancial items accounted for as derivatives in accordance with Topic 815 , or combinations
of these items on the basis of the price that would be received to sell a net long position (i.e., an asset) for a
particular risk exposure or paid to transfer a net short position (i.e., a liability) for a particular risk exposure
in an orderly transaction between market participants at the measurement date under current market
conditions. A reporting entity should measure the fair value of the group of financial assets, financial
liabilities, nonfinancial items accounted for as derivatives in accordance with Topic 815, or combinations of
these items consistently with how market participants would price the net risk exposure at the measurement
date.
The use of the exception to the general measurement guidance is permitted only if the entity does all the
following:
1) Manages the group of financial assets, financial liabilities, nonfinancial items accounted for as
derivatives in accordance with Topic 815, or combinations of these items on the basis of the entity’s net
exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in
accordance with the reporting entity’s documented risk management or investment strategy;
2) Provides information on that basis about the group of financial assets, financial liabilities, nonfinancial
items accounted for as derivatives in accordance with Topic 815, or combinations of these items to the
reporting entity’s management; and
3) Measures those financial assets, financial liabilities, nonfinancial items accounted for as derivatives in
accordance with Topic 815, or combinations of these items at fair value in the statement of financial
position at the end of each reporting period.
The exception does not pertain to financial statement presentation. The basis for the presentation of
financial instruments in the statement of financial position may differ from the basis for the measurement
of financial instruments. In such cases a reporting entity may need to allocate the portfolio-level
adjustments to the individual assets or liabilities that make up the group of financial assets, financial
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liabilities, nonfinancial items accounted for as derivatives in accordance with Topic 815, or combinations of
these items managed on the basis of the reporting entity’s net risk exposure. An entity should perform such
allocations on a reasonable and consistent basis using a methodology appropriate in the circumstances.
This exception applies only to financial assets and financial liabilities within the scope of Topic 815 or Topic
825 and nonfinancial items accounted for as derivatives in accordance with Topic 815.
A reporting entity that uses this exception should apply that accounting policy, including its policy for
allocating bid-ask adjustments and credit adjustments, if applicable, consistently from period to period for a
particular portfolio.
Exposure to Market Risks
When using this exception to measure the fair value of a group of financial assets, financial liabilities,
nonfinancial items accounted for as derivatives in accordance with Topic 815 , or combinations of these
items managed on the basis of the reporting entity’s net exposure to a particular market risk (or risks), the
reporting entity should apply the price within the bid-ask spread that is most representative of fair value in
the circumstances to the reporting entity’s net exposure to those market risks.
When using this exception, a reporting entity should ensure that the market risk (or risks) to which the
reporting entity is exposed within that group of financial assets, financial liabilities, nonfinancial items
accounted for as derivatives in accordance with Topic 815, or combinations of these items is substantially the
same. For example, a reporting entity would not combine the interest rate risk associated with a financial
asset with the commodity price risk associated with a financial liability, because doing so would not mitigate
the reporting entity’s exposure to interest rate risk or commodity price risk. When using the exception, any
basis risk resulting from the market risk parameters not being identical should be taken into account in the
fair value measurement of the financial assets, financial liabilities, nonfinancial items accounted for as
derivatives in accordance with Topic 815, or combinations of these items within the group.
Similarly, the duration of the reporting entity’s exposure to a particular market risk (or risks) arising from
the financial assets, financial liabilities, nonfinancial items accounted for as derivatives in accordance with
Topic 815, or combinations of these items should be substantially the same. For example, a reporting entity
that uses a 12-month futures contract against the cash flows associated with 12 months’ worth of interest
rate risk exposure on a 5-year financial instrument within a group made up of only those financial assets,
financial liabilities, nonfinancial items accounted for as derivatives in accordance with Topic 815, or
combinations of these items measures the fair value of the exposure to 12-month interest rate risk on a net
basis and the remaining interest rate risk exposure (i.e., years 2 through 5) on a gross basis.
Exposure to the Credit Risk of a Particular Counterparty
When using the exception to measure the fair value of a group of financial assets, financial liabilities, items
accounted for as derivatives in accordance with Topic 815, or combinations of these items entered into with a
particular counterparty, the reporting entity should include the effect of the reporting entity’s net exposure
to the credit risk of that counterparty or the counterparty’s net exposure to the credit risk of the reporting
entity in the fair value measurement when market participants would take into account any existing
arrangements that mitigate credit risk exposure in the event of default (e.g., a master netting agreement
with the counterparty or an agreement that requires the exchange of collateral on the basis of each party’s
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net exposure to the credit risk of the other party). The fair value measurement should reflect market
participants’ expectations about the likelihood that such an arrangement would be legally enforceable in the
event of default.
Disclosure
A reporting entity must disclose the accounting policy decision to use the exception described above.
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
35 Subsequent Measurement - Definition of Fair Value - Application to Financial Assets and
Financial Liabilities with Offsetting Positions in Market Risks or Counterparty Risk, paragraphs 35-
18D through 35-18L
50 Disclosure, paragraph 50-2D
Other Guidance ASU No. 2018-09, Codification Improvements
ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Application to Financial Assets and Financial Liabilities When a Reporting Entity Has Offsetting
Positions in Market Risks or Counterparty Credit Risk, paragraphs BC50 through BC65
Relationship Between Measurement and Presentation, paragraphs BC66 through BC69
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IAS/IFRS: Fair Value at Initial Measurement
Fair Value at Initial Measurement (IAS/IFRS)
Summary In an exchange transaction, the transaction price is the price paid to acquire an asset or received to assume a
liability (an entry price). In contrast, the fair value of the asset or liability is the price that would be received
to sell the asset or paid to transfer the liability (an exit price).
In many cases the entry price of an asset or liability will equal the exit price (e.g., when the transaction to buy
an asset would take place in the market in which the asset would be sold). In such cases, the entry
(transaction) price equals the fair value of an asset or a liability at initial recognition.
In other cases where the transaction price differs from fair value and other IFRSs require or permit an entity
to measure an asset or a liability initially at fair value, a gain or loss should be recognized in profit or loss
unless that guidance requires otherwise.
Factors specific to the transaction and the asset or liability should be considered when determining whether
a transaction price represents the fair value of the asset or liability at initial recognition. A transaction price
may not be the best evidence of the fair value of an asset or liability at initial recognition if any of the
following conditions exist:
The transaction is between related parties.
The transaction takes place under duress or the seller is forced to accept the price in the transaction
(e.g., the seller is experiencing financial difficulty).
The unit of account represented by the transaction price is different from the unit of account for the
asset or liability measured at fair value (e.g., the asset or liability measured at fair value is only one of
the elements in the transaction, the transaction includes unstated rights and privileges that are
separately measured, or the transaction price includes transaction costs).
The market in which the transaction takes place is different from the market in which the entity would
sell the asset or transfer the liability (i.e., the most advantageous market).
See the “30 Goodwill or Gain from Bargain Purchase, Including Consideration Transferred - Goodwill and
Negative Goodwill ” section of the 805 Business Combinations chapter for a discussion of gains from a
bargain purchase in a business combination. See the “605 Revenue Recognition ” section of the 905
Agriculture chapter for a discussion on gains or losses on the initial recognition of a biological asset.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.57 - .60, Fair Value Measurement - Measurement - Fair Value at Initial Recognition
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13.B4, Fair Value Measurement - Appendix B: Application Guidance - Fair Value at Initial
Recognition
13.IE23, Fair Value Measurement - Illustrative Examples - Transaction Prices and Fair Value at Initial
Recognition
13.IE24 - .IE26, Fair Value Measurement - Illustrative Examples - Transaction Prices and Fair Value
at Initial Recognition - Example 7: Interest Rate Swap at Initial Recognition
13.BC36 - .BC45, Fair Value Measurement - Basis for Conclusions - Measurement - Definition of Fair
Value - Fair Value as Current Exit Price
13.BC132 - .BC138, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value at
Initial Recognition
9.5.1.1 - .5.1.3, Financial Instruments (July 2014), Chapter 5 Measurement - 5.1 Initial Measurement
9.B5.1.1 - B5.1.2A, Financial Instruments (July 2014), Appendix B - Application Guidance –
Measurement (Chapter 5) - Initial Measurement
International Accounting Standards (IAS)
39.43A, Financial Instruments: Recognition and Measurement - Measurement - Initial Measurement
of Financial Assets and Financial Liabilities
39.AG76, Financial Instruments: Recognition and Measurement – Appendix A: Application Guidance
– Measurement – Fair Value Measurement Considerations - No Active Market: Valuation Technique
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Fair Value at Initial Recognition
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U.S.: Fair Value at Initial Measurement
Fair Value at Initial Measurement (U.S. GAAP)
Summary In an exchange transaction, the transaction price is the price paid to acquire an asset or received to assume a
liability (an entry price). In contrast, the fair value of the asset or liability is the price that would be received
to sell the asset or paid to transfer the liability (an exit price).
In many cases the entry price of an asset or liability will equal the exit price (e.g., when the transaction to buy
an asset would take place in the market in which the asset would be sold). In such cases, the entry
(transaction) price equals the fair value of an asset or a liability at initial recognition.
In other cases where the transaction price differs from fair value and other guidance requires or permits a
reporting entity to measure an asset or a liability initially at fair value, a gain or loss should be recognized in
earnings unless that guidance requires otherwise.
Factors specific to the transaction and the asset or liability should be considered when determining whether
a transaction price represents the fair value of the asset or liability at initial recognition. A transaction price
may not be the best evidence of the fair value of an asset or liability at initial recognition if any of the
following conditions exist:
The transaction is between related parties.
The transaction takes place under duress or the seller is forced to accept the price in the transaction
(e.g., the seller is experiencing financial difficulty).
The unit of account represented by the transaction price is different from the unit of account for the
asset or liability measured at fair value (e.g., the asset or liability measured at fair value is only one of
the elements in the transaction, the transaction includes unstated rights and privileges that are
separately measured, or the transaction price includes transaction costs).
The market in which the transaction takes place is different from the market in which the entity would
sell the asset or transfer the liability (i.e., the most advantageous market).
U.S. GAAP Literature SEC Staff Views
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
Remarks by Cheryl K. Tjon-Hing, Exclusion of Tax Amortization Benefits (December 2006)
Remarks by Joseph D. McGrath, Fair Value - Inception Gains (December 2006)
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FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Dealer Market
Entry Price
Exit Price
Fair Value
Most Advantageous Market
Principal Market
Related Parties
Transaction Costs
Unit of Account
30 Initial Measurement, paragraphs 30-1 through 30-6
35 Subsequent Measurement - Valuation Techniques, paragraph 35-24C
55 Implementation Guidance and Illustrations - Illustrations - Example 5: Transaction Prices and
Initial Fair Value at Initial Recognition- Interest Rate Swap at Initial Recognition, paragraphs 55-46
through 55-49
Other Guidance FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Fair Value at Initial Recognition, paragraph BC81
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
A. Overview and Scope of Topic 820
A-28. Are There Cases Where the Entry Price Paid Would Not Qualify As an Acceptable Fair Value
Estimate?
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
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Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - Specific Considerations for Initial Measurement
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IAS/IFRS: Valuation Techniques
Valuation Techniques (IAS/IFRS)
Summary Paragraph 61 of IFRS 13 Fair Value Measurement states that an “entity shall use valuation techniques that
are appropriate in the circumstances and for which sufficient data are available to measure fair value,
maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.”
The objective is to estimate the price at which an orderly transaction would take place between market
participants at the measurement date. Valuation techniques consistent with the market approach, income
approach, or cost approach are used to measure fair value. The following methods prescribed by IFRS 13 are
described in greater detail in Appendix B, paragraphs 5 – 30 .
Market Approach - The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets or liabilities or a business. An example
would be the use of market multiples derived from a set of comparables. A valuation technique
consistent with the market approach includes matrix pricing. Matrix pricing is a technique that is
sometimes used to price bonds where the fair value of the debt security is based on quoted prices of
other bonds used as a benchmark for the valuation.
Income Approach - The income approach uses valuation techniques to convert future amounts, such
as from cash flows or income and expenses, to a single present (discounted) amount. The fair value
measurement is determined on the basis of the value indicated by current market expectations about
those future amounts. Examples would be the use of: (a) present value techniques; (b) option pricing
models, such as the Black-Scholes-Merton formula (a closed form model), and a binomial model (a
lattice model); and (c) the multi-period excess earnings method. The inputs for the income approach,
such as the projected cash flow and discount rate are generally not observable resulting in greater
reliance on the business management’s estimates. The discount rate applied would be the estimated
discount rate that would be applied by the market participant. Excess earnings methods for estimating
fair value of intangibles are another example of an income approach.
Cost Approach - The cost approach reflects the amount that would currently be required to replace the
service capacity of an asset (often referred to as current replacement cost). From the perspective of a
market participant (seller), the price that would be received for the asset is based on the cost to a
market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for
obsolescence. The current replacement cost approach is generally appropriate for measuring the fair
value of tangible assets using an in-use valuation premise that assumes a market participant would
not pay more for an asset than the amount for which it could construct or replace the service capacity
of that asset.
IFRS 13 does not prescribe which valuation method should be used nor does it provide an indication of the
priorities. Rather, the most appropriate method should be adopted based on the availability of relevant
inputs and the reliability of those inputs.
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In some cases, a single valuation technique will be appropriate; in other cases, multiple valuation techniques
will be appropriate. If multiple valuation techniques are used to measure fair value, the results should be
evaluated considering the reasonableness of the range of values indicated by those results. A fair value
measurement is the point within that range that is most representative of fair value in the circumstances.
In the case where the transaction price is fair value at initial recognition and a valuation technique using
nonobservable inputs will be used to subsequently measure fair value, the valuation technique should be
calibrated so the result of the valuation technique equals the transaction price at initial recognition. Fair
value measurements after initial recognition may use valuation techniques with unobservable inputs. In this
case, those valuation techniques should reflect observable market data (e.g., the price for a similar asset or
liability) at the measurement date.
Valuation techniques used for fair value measurement should be consistently applied. However, a change in
valuation technique or its application is appropriate if the change results in a measurement that is equally or
more representative of the fair value in the circumstances. For example:
New markets develop;
New information becomes available;
Information previously used is no longer available;
Valuation techniques improve; or
Market conditions change.
Revisions resulting from a change in the valuation technique or its application should be accounted for as a
change in accounting estimate (see the “10 Overall - Changes in Accounting Estimates ” sections of the
250 Accounting Changes and Error Corrections chapter).
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.61 - .66, Fair Value Measurement - Measurement - Valuation Techniques
13.B5 - .B30, Fair Value Measurement - Appendix B: Application Guidance - Valuation Techniques
13.BC139 - .BC148, Fair Value Measurement - Basis for Conclusions - Measurement - Valuation
Techniques
13.IE10, Fair Value Measurement - Illustrative Examples - Use of Multiple Valuation Techniques
13.IE11 - .IE14, Fair Value Measurement - Illustrative Examples - Use of Multiple Valuation
Techniques - Example 4: Machine Held and Used
13.IE15 - .IE17, Fair Value Measurement - Illustrative Examples - Use of Multiple Valuation
Techniques - Example 5: Software Asset
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Other Guidance Staff Implementation Guidance - IFRS 13 Fair Value Measurement: Unquoted equity instruments
within the scope of IFRS 9 Financial Instruments
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Valuation Techniques
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U.S.: Valuation Techniques
Valuation Techniques (U.S. GAAP)
Summary Paragraph 820-10-35-24 of Topic 820 Fair Value Measurement states that a “reporting entity shall use
valuation techniques that are appropriate in the circumstances and for which sufficient data are available to
measure fair value, maximizing the use of relevant observable inputs and minimizing the use of
unobservable inputs.”
The objective is to estimate the price at which an orderly transaction would take place between market
participants at the measurement date. Valuation approaches such as the market approach, income approach,
or cost approach are used to measure fair value.
Market Approach - The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets or liabilities or a business. An example
would be the use of market multiples derived from a set of comparables. A valuation technique
consistent with the market approach includes matrix pricing. Matrix pricing is a technique that is
sometimes used to price bonds where the fair value of the debt security is based on quoted prices of
other bonds used as a benchmark for the valuation.
Income Approach - The income approach uses valuation techniques to convert future amounts, such
as from cash flows or income and expenses, to a single present (discounted) amount. The fair value
measurement is determined on the basis of the value indicated by current market expectations about
those future amounts. Examples would be the use of: (a) present value techniques; (b) option pricing
models, such as the Black-Scholes-Merton formula (a closed form model), and a binomial model (a
lattice model); and (c) the multiperiod excess earnings method. The inputs for the income approach,
such as the projected cash flow and discount rate are generally not observable resulting in greater
reliance on the business management’s estimates. The discount rate applied would be the estimated
discount rate that would be applied by the market participant. Excess earnings methods for estimating
fair value of intangibles are another example of an income approach.
Cost Approach - The cost approach reflects the amount that would currently be required to replace the
service capacity of an asset (often referred to as current replacement cost). From the perspective of a
market participant (seller), the price that would be received for the asset is based on the cost to a
market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for
obsolescence. The current replacement cost approach is generally appropriate for measuring the fair
value of tangible assets using an in-use valuation premise that assumes a market participant would
not pay more for an asset than the amount for which it could construct or replace the service capacity
of that asset.
Topic 820 does not prescribe which valuation method should be used nor does it provide an indication of
the priorities. Rather, the most appropriate method should be adopted based on the availability of relevant
inputs and the reliability of those inputs.
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In some cases, a single valuation technique will be appropriate; in other cases, multiple valuation techniques
will be appropriate. If multiple valuation techniques are used to measure fair value, the results should be
evaluated considering the reasonableness of the range of values indicated by those results. A fair value
measurement is the point within that range that is most representative of fair value in the circumstances.
In the case where the transaction price is fair value at initial recognition and a valuation technique using
nonobservable inputs will be used to subsequently measure fair value, the valuation technique should be
calibrated so the result of the valuation technique equals the transaction price at initial recognition. Fair
value measurements after initial recognition may use valuation techniques with unobservable inputs. In this
case, those valuation techniques should reflect observable market data (e.g., the price for a similar asset or
liability) at the measurement date.
Valuation techniques used for fair value measurement should be consistently applied. However, a change in
valuation technique or its application is appropriate if the change results in a measurement that is equally or
more representative of the fair value in the circumstances. For example:
New markets develop;
New information becomes available;
Information previously used is no longer available;
Valuation techniques improve; or
Market conditions change.
Revisions resulting from a change in the valuation technique or its application should be accounted for as a
change in accounting estimate (see the “10 Overall - Changes in Accounting Estimates ” sections of the
250 Accounting Changes and Error Corrections chapter).
U.S. GAAP Literature SEC Staff Views
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (March 2008)
SEC Staff Announcement: Use of Residual Method to Value Acquired Assets Other than Goodwill
(FASB Accounting Standards Codification Section 805-20-S99)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
35 Subsequent Measurement – Valuation Techniques
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General Principles, paragraphs 35-24 through 35-27
Inputs Based on Bid and Ask Prices, paragraphs 35-36C through 35-36D
55 Implementation Guidance and Illustrations – Implementation Guidance – The Fair Value
Measurement Approach – Valuation Techniques, paragraphs 55-3A through 55-3G
55 Implementation Guidance and Illustrations – Implementation Guidance – The Fair Value
Measurement Approach – Present Value Techniques, paragraphs 55-4 through 55-20
55 Implementation Guidance and Illustrations – Illustrations
Example 2: Discount Rate Adjustment Technique - The Build-Up Approach, paragraphs 55-33
through 55-34
Other Guidance ASU No. 2018-09, Codification Improvements
AICPA Audit and Accounting Guide (AAG)
AVG, Assets Acquired to Be Used in Research and Development Activities – Chapter 1: Valuation
Techniques Used to Measure Fair Value of In-Process Research and Development Assets
1.33 - .54, Special Considerations in Auditing Financial Instruments – Valuation of Financial
Instruments – Management's Valuation Process
Special Considerations in Auditing Financial Instruments – Appendix D: Information about the
Black-Scholes Valuation Model
Special Considerations in Auditing Financial Instruments – Appendix E: Information about the
Zero-Coupon Valuation Model
Interpretations Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - Valuation Techniques
Application Guidance - The Fair Value Hierarchy - Use of Bid and Ask Prices
Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
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IAS/IFRS: Inputs to Valuation Techniques
Inputs to Valuation Techniques (IAS/IFRS)
Summary Fair value measurement valuation techniques should maximize the use of relevant observable inputs and
minimize the use of unobservable inputs.
Examples of markets in which inputs might be observable for some assets and liabilities (e.g., financial
instruments) include the following:
In an exchange market, closing prices are both readily available and generally representative of fair
value (e.g., the New York Stock Exchange).
In a dealer market, dealers stand ready to trade (either buy or sell for their own account), thereby
providing liquidity by using their capital to hold an inventory of the items for which they make a
market. Typically bid and ask prices (representing the price at which the dealer is willing to buy and
the price at which the dealer is willing to sell, respectively) are more readily available than closing
prices. Over-the-counter markets (for which prices are publicly reported) are dealer markets. Dealer
markets also exist for some other assets and liabilities, including some financial instruments,
commodities, and physical assets.
In a brokered market, brokers attempt to match buyers with sellers but do not stand ready to trade for
their own account. The broker knows the prices bid and asked by the respective parties, but each party
is typically unaware of another party’s price requirements. Prices of completed transactions are
sometimes available. Brokered markets include electronic communication networks, in which buy and
sell orders are matched, and commercial and residential real estate markets.
In a principal-to-principal market, origination and resale transactions are negotiated independently
with no intermediary. Little information about those transactions may be made available publicly.
Inputs should be selected that are consistent with the characteristics of the asset or liability that market
participants would consider in a transaction for the asset or liability. In some cases those characteristics
result in the application of an adjustment, such as a control premium or noncontrolling interest discount.
However, a fair value measurement should not incorporate a premium or discount that is inconsistent with
the unit of account in the guidance that requires or permits the fair value measurement. Premiums or
discounts that reflect size as a characteristic of the entity’s asset or liability held (e.g., a blockage factor)
rather than as a characteristic of the asset or liability (e.g., a control premium) are not permitted in a fair
value measurement. In all cases, if there is a quoted price in an active market (i.e., a Level 1 input) for an
asset or a liability, an entity shall use that price without adjustment when measuring fair value, except as
discussed in the “10 Overall - Fair Value Hierarchy - Level 1 Inputs ” section of this chapter. This requires
a determination that the market is active and orderly. If the market is not active and orderly, then this
observable price would not be appropriate and another appropriate valuation method would be required.
Inputs Based on Bid and Ask Prices
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When an asset or a liability measured at fair value has a bid price and an ask price (e.g., an input from a
dealer market), the price within the bid-ask spread that is most representative of fair value in the
circumstances should be used to measure fair value regardless of where the input is categorized within the
fair value hierarchy. The use of bid prices for asset positions and ask prices for liability positions is
permitted, but is not required.
The use of mid-market pricing, or other pricing conventions that are used by market participants as a
practical expedient for fair value measurements within a bid-ask spread, is permitted.
Broker quotes may not be based on observable inputs, in which case it will be necessary to determine what
inputs are used for the quote for proper classification of the asset and to evaluate the appropriateness of
using the broker quote as an estimate of fair value.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.67 - .69, Fair Value Measurement - Measurement - Inputs to Valuation Techniques - General
Principles
13.70 - .71, Fair Value Measurement - Measurement - Inputs to Valuation Techniques - Inputs Based
on Bid and Ask Prices
13.A, Fair Value Measurement - Appendix A: Defined Terms
13.B34, Fair Value Measurement - Appendix B: Application Guidance - Inputs to Valuation
Techniques
13.BC149 - .BC165, Fair Value Measurement - Basis for Conclusions - Measurement - Inputs to
Valuation Techniques
Interpretations Fair Value Measurement – Interpretations of IFRS 13
International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Inputs to Valuation Techniques
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U.S.: Inputs to Valuation Techniques
Inputs to Valuation Techniques (U.S. GAAP)
Summary Fair value measurement valuation techniques should maximize the use of relevant observable inputs and
minimize the use of unobservable inputs.
Examples of markets in which inputs might be observable for some assets and liabilities (e.g., financial
instruments) include the following:
In an exchange market, closing prices are both readily available and generally representative of fair
value (e.g., the New York Stock Exchange).
In a dealer market, dealers stand ready to trade (either buy or sell for their own account), thereby
providing liquidity by using their capital to hold an inventory of the items for which they make a
market. Typically bid and ask prices (representing the price at which the dealer is willing to buy and
the price at which the dealer is willing to sell, respectively) are more readily available than closing
prices. Over-the-counter markets (for which prices are publicly reported) are dealer markets. Dealer
markets also exist for some other assets and liabilities, including some financial instruments,
commodities, and physical assets.
In a brokered market, brokers attempt to match buyers with sellers but do not stand ready to trade for
their own account. The broker knows the prices bid and asked by the respective parties, but each party
is typically unaware of another party’s price requirements. Prices of completed transactions are
sometimes available. Brokered markets include electronic communication networks, in which buy and
sell orders are matched, and commercial and residential real estate markets.
In a principal-to-principal market, origination and resale transactions are negotiated independently
with no intermediary. Little information about those transactions may be made available publicly.
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Inputs Based on Bid and Ask Prices
When an asset or a liability measured at fair value has a bid price and an ask price (e.g., an input from a
dealer market), the price within the bid-ask spread that is most representative of fair value in the
circumstances should be used to measure fair value regardless of where the input is categorized within the
fair value hierarchy. The use of bid prices for asset positions and ask prices for liability positions is
permitted, but is not required.
[Effective prior to the adoption of the amendments in ASU 2022-03 .]
Inputs should be selected that are consistent with the characteristics of the asset or liability that market
participants would consider in a transaction for the asset or liability. In some cases those characteristics
result in the application of an adjustment, such as a control premium or noncontrolling interest discount.
However, a fair value measurement should not incorporate a premium or discount that is inconsistent with
the unit of account in the guidance that requires or permits the fair value measurement. Premiums or
discounts that reflect size as a characteristic of the reporting entity’s asset or liability held (e.g., a blockage
factor) rather than as a characteristic of the asset or liability (e.g., a control premium) are not permitted in a
fair value measurement. In all cases, if there is a quoted price in an active market (i.e., a Level 1 input) for
an asset or a liability, an entity shall use that price without adjustment when measuring fair value, except
as discussed in the “10 Overall - Fair Value Hierarchy - Level 1 Inputs ” section of this chapter. This
requires a determination that the market is active and orderly. If the market is not active and orderly, then
this observable price would not be appropriate and another appropriate valuation method would be
required.
[Effective after the adoption of the amendments in ASU 2022-03.]
Inputs should be selected that are consistent with the characteristics of the asset or liability that market
participants would consider in a transaction for the asset or liability. In some cases those characteristics
result in the application of an adjustment, such as a control premium or noncontrolling interest discount.
However, a fair value measurement should not incorporate a premium or discount that is inconsistent with
the unit of account in the guidance that requires or permits the fair value measurement. Premiums or
discounts that reflect size as a characteristic of the reporting entity’s asset or liability held (e.g., a blockage
factor) rather than as a characteristic of the asset or liability (e.g., a control premium) are not permitted in a
fair value measurement. Similarly, a discount applied to the price of an equity security because of a
contractual sale restriction is inconsistent with the unit of account being the equity security. A contractual
sale restriction is a characteristic of the reporting entity holding the equity security rather than a
characteristic of the asset and, therefore, is not considered in measuring the fair value of an equity security
(see ASC paragraphs 820-10-55-52 through 55-52A ). A contractual sale restriction prohibiting the sale of
an equity security is a characteristic of the reporting entity holding the equity security and should not be
separately recognized as its own unit of account. In all cases, if there is a quoted price in an active market
(i.e., a Level 1 input) for an asset or a liability, an entity shall use that price without adjustment when
measuring fair value, except as discussed in the “10 Overall - Fair Value Hierarchy - Level 1 Inputs ” section
of this chapter. This requires a determination that the market is active and orderly. If the market is not
active and orderly, then this observable price would not be appropriate and another appropriate valuation
method would be required.
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The use of mid-market pricing, or other pricing conventions that are used by market participants as a
practical expedient for fair value measurements within a bid-ask spread, is permitted.
Broker quotes may not be based on observable inputs, in which case it will be necessary to determine what
inputs are used for the quote for proper classification of the asset and to evaluate the appropriateness of
using the broker quote as an estimate of fair value.
U.S. GAAP Literature SEC Staff Views
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Cost Approach
Discount Rate Adjustment Technique
Expected Cash Flow
General Market Risk
Income Approach
Market Approach
Obsolescence
Present Value
Risk Premium
Systematic Risk
Unsystematic Risk
35 Subsequent Measurement – Inputs to Valuation Techniques
General Principles, paragraphs 35-36 through 35-36B
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Inputs Based on Bid and Ask Prices, paragraphs 35-36C through 35-36D
55 Implementation Guidance and Illustrations – Implementation Guidance – The Fair Value
Measurement Approach – Present Value Techniques, paragraphs 55-4 through 55-20
55 Implementation Guidance and Illustrations – Illustrations – Example 2: Discount Rate
Adjustment Technique-The Build-Up Model Approach, paragraphs 55-33 through 55-34
55 Implementation Guidance and Illustrations – Illustrations – Example 3: Use of Multiple
Valuation Techniques, paragraphs 55-35 through 55-41
Other Guidance FASB ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions
FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Inputs Based on Bid and Ask Prices, paragraphs BC70 through BC72
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - Inputs to Valuation Techniques
Application Guidance - The Fair Value Hierarchy - Use of Bid and Ask Prices
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IAS/IFRS: Present Value Techniques
Present Value Techniques (IAS/IFRS)
Summary This section discusses the use of present value techniques to measure fair value and focuses on a discount
rate adjustment technique and an expected cash flow (expected present value) technique. The technique used
to measure fair value will depend on facts and circumstances specific to the asset or liability being measured
(e.g., whether prices for comparable assets or liabilities can be observed in the market) and the availability of
sufficient data.
The Components of a Present Value Measurement
Present value is a tool used to link future amounts to a present amount using a discount rate. A fair value
measurement of an asset or a liability using a present value technique captures all the following elements
from the perspective of market participants at the measurement date:
An estimate of future cash flows for the asset or liability being measured.
Expectations about possible variations in the amount and timing of the cash flows representing the
uncertainty inherent in the cash flows.
The time value of money, represented by the rate on risk-free monetary assets that have maturity
dates or durations that coincide with the period covered by the cash flows and pose neither uncertainty
in timing nor risk of default to the holder (i.e., a risk-free interest rate).
The price for bearing the uncertainty inherent in the cash flows (i.e., a risk premium).
Other factors that market participants would take into account in the circumstances.
For a liability, the non-performance risk relating to that liability, including the entity’s (i.e., the
obligor’s) own credit risk.
General Principles
Paragraph B14 of IFRS 13 Fair Value Measurement states that all the following general principles govern the
application of any present value technique used to measure fair value:
(a) Cash flows and discount rates should reflect assumptions that market participants would use when
pricing the asset or liability.
(b) Cash flows and discount rates should take into account only the factors attributable to the asset or
liability being measured.
(c) To avoid double-counting or omitting the effects of risk factors, discount rates should reflect
assumptions that are consistent with those inherent in the cash flows. For example, a discount rate that
reflects the uncertainty in expectations about future defaults is appropriate if using contractual cash
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flows of a loan (ie a discount rate adjustment technique). That same rate should not be used if using
expected (ie probability-weighted) cash flows (ie an expected present value technique) because the
expected cash flows already reflect assumptions about the uncertainty in future defaults; instead, a
discount rate that is commensurate with the risk inherent in the expected cash flows should be used.
(d) Assumptions about cash flows and discount rates should be internally consistent. For example,
nominal cash flows, which include the effect of inflation, should be discounted at a rate that includes the
effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows,
which exclude the effect of inflation, should be discounted at a rate that excludes the effect of inflation.
Similarly, after-tax cash flows should be discounted using an after-tax discount rate. Pre-tax cash flows
should be discounted at a rate consistent with those cash flows.
(e) Discount rates should be consistent with the underlying economic factors of the currency in which the
cash flows are denominated.
Risk and Uncertainty
A fair value measurement using present value techniques is made under conditions of uncertainty because
the cash flows used are estimates rather than known amounts; in many cases both the amount and timing of
the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are
uncertain if there is risk of default.
A fair value measurement should include a risk premium reflecting the amount that market participants
would demand as compensation for the uncertainty inherent in the cash flows. Present value techniques
differ in how they adjust for risk and in the type of cash flows they use. For example:
The discount rate adjustment technique uses a risk-adjusted discount rate and contractual, promised
or most likely cash flows.
Method 1 of the expected present value technique uses risk-adjusted expected cash flows and a risk-
free rate.
Method 2 of the expected present value technique uses expected cash flows that are not risk-adjusted
and a discount rate adjusted to include the risk premium that market participants require. That rate is
different from the rate used in the discount rate adjustment technique.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.B10 - .B11, Fair Value Measurement - Appendix B: Application Guidance - Valuation Techniques -
Income Approach
13.B12, Fair Value Measurement - Appendix B: Application Guidance - Valuation Techniques -
Income Approach - Present Value Techniques
13.B13- .B30, Fair Value Measurement - Appendix B: Application Guidance - Valuation Techniques -
Income Approach - The Components of a Present Value Measurement
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13.IE34, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example 10:
Structured Note
13.IE35 - .IE39, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example
11: Decommissioning Liability
13.IE43 - .IE47, Fair Value Measurement - Illustrative Examples - Measuring Liabilities - Example
13- Debt Obligation - Present Value Technique
13.IE48 - .IE58, Fair Value Measurement - Illustrative Examples – Measuring Fair Value when the
Volume or Level of Activity for an Asset or a Liability has Significantly Decreased - Example 14:
Estimating a Market Rate of Return when the Volume or level of Activity for an asset has Significantly
Decreased
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U.S.: Present Value Techniques
Present Value Techniques (U.S. GAAP)
Summary This section discusses the use of present value techniques to measure fair value and focuses on a discount
rate adjustment technique and an expected cash flow (expected present value) technique. The technique used
to measure fair value will depend on facts and circumstances specific to the asset or liability being measured
(e.g., whether prices for comparable assets or liabilities can be observed in the market) and the availability of
sufficient data.
The Components of a Present Value Measurement
Present value is a tool used to link future amounts to a present amount using a discount rate. A fair value
measurement of an asset or a liability using a present value technique captures all the following elements
from the perspective of market participants at the measurement date:
An estimate of future cash flows for the asset or liability being measured.
Expectations about possible variations in the amount and timing of the cash flows representing the
uncertainty inherent in the cash flows.
The time value of money, represented by the rate on risk-free monetary assets that have maturity
dates or durations that coincide with the period covered by the cash flows and pose neither uncertainty
in timing nor risk of default to the holder (ie a risk-free interest rate).
The price for bearing the uncertainty inherent in the cash flows (ie a risk premium).
Other factors that market participants would take into account in the circumstances.
For a liability, the non-performance risk relating to that liability, including the entity’s (ie the
obligor’s) own credit risk.
General Principles
Paragraph 820-10-55-6 of Topic 820 Fair Value Measurement states that all the following general
principles govern the application of any present value technique used to measure fair value:
(a) Cash flows and discount rates should reflect assumptions that market participants would use when
pricing the asset or liability.
(b) Cash flows and discount rates should take into account only the factors attributable to the asset or
liability being measured.
(c) To avoid double-counting or omitting the effects of risk factors, discount rates should reflect
assumptions that are consistent with those inherent in the cash flows. For example, a discount rate that
reflects the uncertainty in expectations about future defaults is appropriate if using contractual cash
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flows of a loan (ie a discount rate adjustment technique). That same rate should not be used if using
expected (ie probability-weighted) cash flows (ie an expected present value technique) because the
expected cash flows already reflect assumptions about the uncertainty in future defaults; instead, a
discount rate that is commensurate with the risk inherent in the expected cash flows should be used.
(d) Assumptions about cash flows and discount rates should be internally consistent. For example,
nominal cash flows, which include the effect of inflation, should be discounted at a rate that includes the
effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows,
which exclude the effect of inflation, should be discounted at a rate that excludes the effect of inflation.
Similarly, after-tax cash flows should be discounted using an after-tax discount rate. Pre-tax cash flows
should be discounted at a rate consistent with those cash flows.
(e) Discount rates should be consistent with the underlying economic factors of the currency in which the
cash flows are denominated.
Risk and Uncertainty
A fair value measurement using present value techniques is made under conditions of uncertainty because
the cash flows used are estimates rather than known amounts; in many cases both the amount and timing of
the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are
uncertain if there is risk of default.
A fair value measurement should include a risk premium reflecting the amount that market participants
would demand as compensation for the uncertainty inherent in the cash flows. Present value techniques
differ in how they adjust for risk and in the type of cash flows they use. For example:
The discount rate adjustment technique uses a risk-adjusted discount rate and contractual, promised
or most likely cash flows.
Method 1 of the expected present value technique uses risk-adjusted expected cash flows and a risk-
free rate.
Method 2 of the expected present value technique uses expected cash flows that are not risk-adjusted
and a discount rate adjusted to include the risk premium that market participants require. That rate is
different from the rate used in the discount rate adjustment technique.
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall, 55 Implementation Guidance and Illustrations
Implementation Guidance - The Fair Value Measurement Approach
Valuation Techniques - Income Approach, paragraphs 55-3F through 55-55-3G
Present Value Techniques, paragraph 55-4
Present Value Techniques - The Components of a Present Value Measurement, paragraph 55-5
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Present Value Techniques - General Principles, paragraph 55-6
Present Value Techniques - Risk and Uncertainty, paragraphs 55-7 through 55-9
Present Value Techniques - Discount Rate Adjustment Technique, paragraphs 55-10 through
55-12
Present Value Techniques - Expected Present Value Technique, paragraphs 55-13 through 55-
20
Illustrations
Example 7: Measuring Liabilities, paragraphs 55-55A through 55-56
Case B: Structured Note, paragraphs 55-58 through 55-59
Case C: Asset Retirement Obligation, paragraphs 55-77 through 55-81
Case E: Debt Obligation - Present Value Technique, paragraphs 55-85 through 55-89
Example 8: Measuring Fair Value When the Volume or Level of Activity for an Asset or a
Liability Has Significantly Decreased, paragraphs 55-90 through 55-98
Other Guidance Financial Accounting Standards Board
FASB Concepts Statements - Original Pronouncements (As Amended)
CON 7: Using Cash Flow Information and Present Value in Accounting Measurements
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
C-38. What Are the Methods That Are Utilized in Valuing Assets and Liabilities with
Unobservable Inputs?
C-39. What Guidance Is Provided in Topic 820 on the Use of Present Value Techniques?
C-40. Does the Guidance in Topic 820 on the Use of Present Value Techniques Differ from Basic
Present Value Analysis Covered In Finance and Accounting Textbooks?
C-41. What Is Meant by "Internally Consistent" in the Context of Assumptions About Cash Flows
and Discount Rates When Applying Present Value Analysis?
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IAS/IFRS: Fair Value Hierarchy
Fair Value Hierarchy (IAS/IFRS)
Summary IFRS 13 establishes a three level hierarchy of fair value measurement, referred to as levels 1 (with highest
priority), level 2 and level 3 (with lowest priority). Ordering of priority reflects the degree to which objective
prices in external active markets are available to measure fair value.
Level 1 includes assets and liabilities that have an active market that provides an objective quoted value for
each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most
objective measurement of fair value. Level 2 is less objective and level 3 is the least objective (most
subjective) in estimating fair value.
Level 2 assets and liabilities are ones where there is no active market in the same assets, but where there are
parallel markets or alternative means to estimate fair value using observable information inputs such as the
value placed on similar assets or liabilities that were recently traded.
Level 3 fair values are based on information from the entity that reports these values in their financial
statements. Such data are referred to as unobservable, in that the valuations are not based on data available
to parties outside the entity.
Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy.
Inputs here refers explicitly to the types of information used to obtain the fair value of the asset or liability.
Observable inputs includes data sources and market prices available and visible outside of the entity.
While there will continue to be judgments required when an active market price is not available, these
inputs are external to the entity and observable outside the entity; they are consequently considered
more objective than internal unobservable inputs used for level 3 fair value.
Unobservable inputs are data and analyses that are developed within the entity to assess the fair value,
such as management estimates of future benefits from use of assets.
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The inputs used to measure the fair value of an asset or a liability might be categorized within different levels
of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the
same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
Adjustments to arrive at measurements based on fair value (e.g., costs to sell when measuring fair value less
costs to sell) should not be considered when determining the level of the fair value hierarchy within which a
fair value measurement is categorized.
The fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation techniques used to
measure fair value. For example, a fair value measurement developed using a present value technique might
be categorized within Level 2 or Level 3, depending on the inputs that are significant to the entire
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measurement and the level of the fair value hierarchy within which those inputs are categorized.
When an observable input requires an adjustment using an unobservable input and that adjustment results in
a significantly higher or lower fair value measurement, the resulting measurement would be categorized
within Level 3 of the fair value hierarchy. For example, if a market participant would consider the effect of a
restriction on the sale of an asset when estimating the price for the asset, the quoted price would be adjusted
to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an
unobservable input that is significant to the entire measurement, the measurement would be categorized
within Level 3 of the fair value hierarchy.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.72 - .75, Fair Value Measurement - Measurement - Fair Value Hierarchy
13.BC166 - .BC167, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value
Hierarchy
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Fair Value Hierarchy
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U.S.: Fair Value Hierarchy
Fair Value Hierarchy (U.S. GAAP)
Summary Topic 820 Fair Value Measurement establishes a three level hierarchy of fair value measurement, referred to
as levels 1 (with highest priority), level 2 and level 3 (with lowest priority). Ordering of priority reflects the
degree to which objective prices in external active markets are available to measure fair value.
Level 1 includes assets and liabilities that have an active market that provides an objective quoted value for
each unit. Here the active market quoted value is used to measure the fair value. Level 1 has the most
objective measurement of fair value. Level 2 is less objective and level 3 is the least objective (most
subjective) in estimating fair value.
Level 2 assets and liabilities are ones where there is no active market in the same assets, but where there are
parallel markets or alternative means to estimate fair value using observable information inputs such as the
value placed on similar assets or liability that were recently traded.
Level 3 fair values are based on information from the entity that reports these values in their financial
statements. Such data are referred to as unobservable, in that the valuations are not based on data available
to parties outside the entity.
Observable and unobservable inputs are the key elements that separate the levels in the fair value hierarchy.
Inputs here refers explicitly to the types of information used to obtain the fair value of the asset or liability.
Observable inputs includes data sources and market prices available and visible outside of the entity.
While there will continue to be judgments required when an active market price is not available, these
inputs are external to the entity and observable outside the entity; they are consequently considered
more objective than internal unobservable inputs used for level 3 fair value.
Unobservable inputs are data and analyses that are developed within the entity to assess the fair value,
such as management estimates of future benefits from use of assets.
The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The inputs used to measure the fair value of an asset or a liability might be categorized within different levels
of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the
same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
Adjustments to arrive at measurements based on fair value (e.g., costs to sell when measuring fair value less
costs to sell) should not be considered when determining the level of the fair value hierarchy within which a
fair value measurement is categorized.
The fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation techniques used to
measure fair value. For example, a fair value measurement developed using a present value technique might
be categorized within Level 2 or Level 3, depending on the inputs that are significant to the entire
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measurement and the level of the fair value hierarchy within which those inputs are categorized.
When an observable input requires an adjustment using an unobservable input and that adjustment results in
a significantly higher or lower fair value measurement, the resulting measurement would be categorized
within Level 3 of the fair value hierarchy. For example, if a market participant would consider the effect of a
restriction on the sale of an asset when estimating the price for the asset, the quoted price would be adjusted
to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an
unobservable input that is significant to the entire measurement, the measurement would be categorized
within Level 3 of the fair value hierarchy.
U.S. GAAP Literature SEC Staff Views
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (March 2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary
Active Market
Brokered Market
Dealer Market
Exchange Market
Financial Asset
Financial Liability
Inputs
Level 1 Inputs
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Level 2 Inputs
Market-Corroborated Inputs
Observable Inputs
Principal-to-Principal Market
Unobservable Inputs
35 Subsequent Measurement - Fair Value Hierarchy, paragraphs 35-37 through 35-38A
946, Financial Services-Investment Companies, 320 Investments-Debt and Equity Securities, 35
Subsequent Measurement - Methods of Valuing Securities - Market-Traded Securities, paragraphs 35-
2 through 35-3
Interpretations Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - The Fair Value Hierarchy
Interpretations of Topic 820, “Fair Value Measurement”
B. The Fair Value Hierarchy
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
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IAS/IFRS: Level 1 Inputs
Level 1 Inputs (IAS/IFRS)
Summary Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the
measurement date.
A Level 1 input will be available for many financial assets and financial liabilities. The emphasis within Level
1 is on determining both of the following:
The principal (or most advantageous) market for the asset or liability; and
Whether the entity can enter into a transaction for the asset or liability at the price in that market at
the measurement date.
An adjustment should not be made to a Level 1 input except in the following circumstances (which result in a
fair value measurement categorized within a lower level of the fair value hierarchy, i.e. level 2 or level 3):
When an entity holds a large number of similar (but not identical) assets or liabilities (e.g., debt
securities) that are measured at fair value and a quoted price in an active market is available but not
readily accessible for each of those assets or liabilities individually. In that case, as a practical
expedient, an entity may measure fair value using an alternative pricing method that does not rely
exclusively on quoted prices (e.g., matrix pricing). For example, common shares held in a hedge fund
that restricts the timing that the funds can be liquidated require and adjustment to the active market
price reflecting this restriction and results in the classification of this asset as level 2 or level 3
depending on whether the input for the adjustment is observable (level 2) or unobservable (level 3).
When a quoted price in an active market does not represent fair value at the measurement date. For
example, significant events (e.g., transactions in a principal-to-principal market, trades in a brokered
market, or announcements) take place after the close of a market but before the measurement date. An
entity should establish and consistently apply a policy for identifying those events that might affect
fair value measurements.
When measuring the fair value of a liability or an entity’s own equity instrument using the quoted
price for the identical item traded as an asset in an active market and that price needs to be adjusted
for factors specific to the item or the asset (see the “10 Overall - Application to Liabilities and an
Entity’s Own Equity Instruments ” section of this chapter).
In a position in a single asset or liability (including a position comprising a large number of identical assets
or liabilities, such as a holding of financial instruments) where the asset or liability is traded in an active
market, the fair value of the asset or liability should be measured within Level 1 as the product of the quoted
price for the individual asset or liability and the quantity held by the entity. That is the case even if a market’s
normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the
position in a single transaction might affect the quoted price.
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IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.76 - .80, Fair Value Measurement - Measurement - Fair Value Hierarchy - Level 1 Inputs
13.BC168 - .BC170, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value
Hierarchy - Level 1 Inputs
13.IE19 - .IE22, Fair Value Measurement - Illustrative Examples - Principal (Or Most Advantageous)
Market - Example 6: Level 1 Principal (Or Most Advantageous) Market
Interpretations Fair Value Measurement – Interpretations of IFRS 13
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U.S.: Level 1 Inputs
Level 1 Inputs (U.S. GAAP)
Summary Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the
measurement date.
A Level 1 input will be available for many financial assets and financial liabilities. The emphasis within Level
1 is on determining both of the following:
The principal (or most advantageous) market for the asset or liability; and
Whether the reporting entity can enter into a transaction for the asset or liability at the price in that
market at the measurement date.
An adjustment should not be made to a Level 1 input except in the following circumstances (which result in a
fair value measurement categorized within a lower level of the fair value hierarchy, i.e. level 2 or level 3):
When a reporting entity holds a large number of similar (but not identical) assets or liabilities (e.g.,
debt securities) that are measured at fair value and a quoted price in an active market is available but
not readily accessible for each of those assets or liabilities individually. In that case, as a practical
expedient, a reporting entity may measure fair value using an alternative pricing method that does not
rely exclusively on quoted prices (e.g., matrix pricing). For example, common shares held in a hedge
fund that restricts the timing that the funds can be liquidated require and adjustment to the active
market price reflecting this restriction and results in the classification of this asset as level 2 or level 3
depending on whether the input for the adjustment is observable (level 2) or unobservable (level 3).
When a quoted price in an active market does not represent fair value at the measurement date. For
example, significant events (i.e., transactions in a principal-to-principal market, trades in a brokered
market, or announcements) take place after the close of a market but before the measurement date. A
reporting entity should establish and consistently apply a policy for identifying those events that
might affect fair value measurements.
When measuring the fair value of a liability or a reporting entity’s own equity instrument using the
quoted price for the identical item traded as an asset in an active market and that price needs to be
adjusted for factors specific to the item or the asset (see the “10 Overall - Application to Liabilities
and an Entity’s Own Equity Instruments ” section of this chapter).
In a position in a single asset or liability (including a position comprising a large number of identical assets
or liabilities, such as a holding of financial instruments) where the asset or liability is traded in an active
market, the fair value of the asset or liability should be measured within Level 1 as the product of the quoted
price for the individual asset or liability and the quantity held by the reporting entity. That is the case even if
a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell
the position in a single transaction might affect the quoted price.
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U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary - Level 1 Inputs
35 Subsequent Measurement - Fair Value Hierarchy - Level 1 Inputs, paragraphs 35-40 through
35-46
55 Implementation Guidance and Illustrations - Illustrations - Example 4: Level 1 Principal (or
Most Advantageous) Market, paragraphs 55-42 through 55-45A
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
B. The Fair Value Hierarchy
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - The Fair Value Hierarchy - Level 1 Inputs
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IAS/IFRS: Level 2 Inputs
Level 2 Inputs (IAS/IFRS)
Summary Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
Level 2 inputs must be observable for substantially the full term of the asset or liability if such asset or
liability has a contractual term, and include the following:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in markets that are not active;
Observable inputs other than quoted prices for the asset or liability (e.g., interest rates and yield
curves observable at commonly quoted intervals; implied volatilities; and credit spreads); and
Market-corroborated inputs.
Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability, and include the
following:
The condition or location of the asset;
The extent to which inputs relate to items that are comparable to the asset or liability (including those
factors described in the “Application to Liabilities and an Entity’s Own Equity Instruments ” section
of this chapter); and
The volume or level of activity in the markets within which the inputs are observed.
An adjustment using unobservable inputs that is significant to the entire measurement might result in a fair
value measurement categorized within Level 3 of the fair value hierarchy. Unobservable inputs used to
estimate fair value would disqualify the asset or liability from being included in level 2 with few exceptions as
noted in the paragraph 171 of the IFRS 13 Basis for Conclusions.
Paragraph B35 of IFRS 13 Fair Value Measurement describes the use of Level 2 inputs for particular assets
and liabilities.
B35 Examples of Level 2 inputs for particular assets and liabilities include the following:
(a) Receive-fixed, pay-variable interest rate swap based on the London Interbank Offered Rate (LIBOR) swap
rate. A Level 2 input would be the LIBOR swap rate if that rate is observable at commonly quoted
intervals for substantially the full term of the swap.
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(b) Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a foreign currency.
A Level 2 input would be the swap rate based on a yield curve denominated in a foreign currency that is
observable at commonly quoted intervals for substantially the full term of the swap. That would be the
case if the term of the swap is 10 years and that rate is observable at commonly quoted intervals for 9
years, provided that any reasonable extrapolation of the yield curve for year 10 would not be significant
to the fair value measurement of the swap in its entirety.
(c) Receive-fixed, pay-variable interest rate swap based on a specific bank’s prime rate. A Level 2 input
would be the bank’s prime rate derived through extrapolation if the extrapolated values are
corroborated by observable market data, for example, by correlation with an interest rate that is
observable over substantially the full term of the swap.
(d) Three-year option on exchange-traded shares. A Level 2 input would be the implied volatility for the
shares derived through extrapolation to year 3 if both of the following conditions exist:
(i) Prices for one-year and two-year options on the shares are observable.
(ii) The extrapolated implied volatility of a three-year option is corroborated by observable market
data for substantially the full term of the option.
In that case the implied volatility could be derived by extrapolating from the implied volatility of the
one-year and two-year options on the shares and corroborated by the implied volatility for three-year
options on comparable entities’ shares, provided that correlation with the one-year and two-year
implied volatilities is established.
(e) Licensing arrangement. For a licensing arrangement that is acquired in a business combination and
was recently negotiated with an unrelated party by the acquired entity (the party to the licensing
arrangement), a Level 2 input would be the royalty rate in the contract with the unrelated party at
inception of the arrangement.
(f) Finished goods inventory at a retail outlet. For finished goods inventory that is acquired in a business
combination, a Level 2 input would be either a price to customers in a retail market or a price to
retailers in a wholesale market, adjusted for differences between the condition and location of the
inventory item and the comparable (ie similar) inventory items so that the fair value measurement
reflects the price that would be received in a transaction to sell the inventory to another retailer that
would complete the requisite selling efforts. Conceptually, the fair value measurement will be the
same, whether adjustments are made to a retail price (downward) or to a wholesale price (upward).
Generally, the price that requires the least amount of subjective adjustments should be used for the
fair value measurement.
(g) Building held and used. A Level 2 input would be the price per square meter for the building (a
valuation multiple) derived from observable market data, eg multiples derived from prices in observed
transactions involving comparable (ie similar) buildings in similar locations.
(h) Cash-generating unit. A Level 2 input would be a valuation multiple (eg a multiple of earnings or
revenue or a similar performance measure) derived from observable market data, eg multiples derived
from prices in observed transactions involving comparable (ie similar) businesses, taking into
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account operational, market, financial and non-financial factors.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.81 - .85, Fair Value Measurement - Measurement - Fair Value Hierarchy - Level 2 Inputs
13.B35, Fair Value Measurement - Appendix B: Application Guidance - Fair Value Hierarchy - Level 2
Inputs
13.BC171, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value Hierarchy -
Level 2 Inputs
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U.S.: Level 2 Inputs
Level 2 Inputs (U.S. GAAP)
Summary Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
Level 2 inputs must be observable for substantially the full term of the asset or liability if such asset or
liability has a contractual term, and include the following:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in markets that are not active;
Observable inputs other than quoted prices for the asset or liability (e.g., interest rates and yield
curves observable at commonly quoted intervals; implied volatilities; and credit spreads); and
Market-corroborated inputs.
Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability, and include the
following:
The condition or location of the asset;
The extent to which inputs relate to items that are comparable to the asset or liability (including those
factors described in the “Application to Liabilities and an Entity’s Own Equity Instruments ” section
of this chapter); and
The volume or level of activity in the markets within which the inputs are observed.
An adjustment using unobservable inputs that is significant to the entire measurement might result in a fair
value measurement categorized within Level 3 of the fair value hierarchy.
Paragraph 820-10-55-21 of Topic 820 Fair Value Measurement describes the use of Level 2 inputs for
particular assets and liabilities.
820-10-55-21 Examples of Level 2 inputs for particular assets and liabilities include the following:
a. Receive-fixed, pay-variable interest rate swap based on the London Interbank Offered Rate (LIBOR)
swap rate. A Level 2 input would be the LIBOR swap rate if that rate is observable at commonly quoted
intervals for substantially the full term of the swap.
b. Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a foreign
currency. A Level 2 input would be the swap rate based on a yield curve denominated in a foreign
currency that is observable at commonly quoted intervals for substantially the full term of the swap.
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That would be the case if the term of the swap is 10 years and that rate is observable at commonly
quoted intervals for 9 years, provided that any reasonable extrapolation of the yield curve for year 10
would not be significant to the fair value measurement of the swap in its entirety.
c. Receive-fixed, pay-variable interest rate swap based on a specific bank’s prime rate. A Level 2 input
would be the bank’s prime rate derived through extrapolation if the extrapolated values are
corroborated by observable market data, for example, by correlation with an interest rate that is
observable over substantially the full term of the swap.
d. Three-year option on exchange-traded shares. A Level 2 input would be the implied volatility for the
shares derived through extrapolation to year 3 if both of the following conditions exist:
1. Prices for one-year and two-year options on the shares are observable.
2. The extrapolated implied volatility of a three-year option is corroborated by observable market
data for substantially the full term of the option.
In that case the implied volatility could be derived by extrapolating from the implied volatility of
the one-year and two-year options on the shares and corroborated by the implied volatility for
three-year options on comparable entities’ shares, provided that correlation with the one-year and
two-year implied volatilities is established.
e. Licensing arrangement. For a licensing arrangement that is acquired in a business combination and
was recently negotiated with an unrelated party by the acquired entity (the party to the licensing
arrangement), a Level 2 input would be the royalty rate in the contract with the unrelated party at
inception of the arrangement.
f. Finished goods inventory at a retail outlet. For finished goods inventory that is acquired in a
business combination, a Level 2 input would be either a price to customers in a retail market or a price
to retailers in a wholesale market, adjusted for differences between the condition and location of the
inventory item and the comparable (that is, similar) inventory items so that the fair value
measurement reflects the price that would be received in a transaction to sell the inventory to another
retailer that would complete the requisite selling efforts. Conceptually, the fair value measurement
will be the same, whether adjustments are made to a retail price (downward) or to a wholesale price
(upward). Generally, the price that requires the least amount of subjective adjustments should be used
for the fair value measurement.
g. Building held and used. A Level 2 input would be the price per square foot for the building (a
valuation multiple) derived from observable market data, for example, multiples derived from prices
in observed transactions involving comparable (that is, similar) buildings in similar locations.
h. Reporting unit. A Level 2 input would be a valuation multiple (for example, a multiple of earnings or
revenue or a similar performance measure) derived from observable market data, for example,
multiples derived from prices in observed transactions involving comparable (that is, similar)
businesses, taking into account operational, market, financial and nonfinancial factors.
U.S. GAAP Literature SEC Staff Views
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Minutes of CAQ SEC Regulations Committee, VI. Validation of Quotes from Pricing Services on Level
2 Assets and Liabilities (September 27, 2011)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary - Level 2 Inputs
35 Subsequent Measurement - Fair Value Hierarchy - Level 2 Inputs, paragraphs 35-47 through
35-51
55 Implementation Guidance and Illustrations - Implementation Guidance - The Fair Value
Measurement Approach - Fair Value Hierarchy - Level 2 Inputs, paragraph 55-21
Other Guidance FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Application of Premiums and Discounts in a Fair Value Measurement, paragraphs BC73 through
BC80
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
B. The Fair Value Hierarchy
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - The Fair Value Hierarchy - Level 2 Inputs
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IAS/IFRS: Level 3 Inputs
Level 3 Inputs (IAS/IFRS)
Summary Level 3 inputs are unobservable inputs that are used to estimate the fair value of the asset or liability.
Unobservable inputs should be used to measure fair value to the extent that relevant observable inputs are
not available allowing a fair value measurement in situations in which there is little, if any, market activity
for the asset or liability at the measurement date. Unobservable inputs should reflect the assumptions
(including assumptions about risk) that market participants would use when pricing the asset or liability.
Assumptions about risk include the risk inherent in a particular valuation technique (e.g., a pricing model)
and the risk inherent in the inputs to the valuation technique, if market participants would include an
assumption for risk when pricing the asset or liability.
An entity should develop unobservable inputs using the best information available in the circumstances,
which might include the entity’s own data. When an entity begins with its own data, it should adjust the data
if reasonably available information indicates that other market participants would use different data or there
is something particular to the entity that is not available to other market participants. An entity should
consider all information about market participant assumptions that is reasonably available. Unobservable
inputs developed in this manner are considered market participant assumptions and meet the objective of a
fair value measurement.
The issues associated with the selection of inputs when markets may not be orderly and active is reflected in
the following comment in the Basis for Conclusions of IFRS 13, paragraph 175 . This quote hints at the
dynamics and pressures on management and auditors that were experienced during the financial crisis and
which continue to require judgments about market conditions and adequacy of unobservable inputs used for
level 3 fair value estimates.
Some respondents expressed concerns that an entity would be compelled by its auditors or regulators to
undertake exhaustive efforts to obtain information about the assumptions that market participants would
use when pricing the asset or liability. Furthermore, they were concerned that their judgment would be
questioned when asserting the absence of contrary data. IFRS 13 states that such exhaustive efforts would
not be necessary. However, when information about market participant assumptions is reasonably
available, an entity cannot ignore it.
Paragraph B36 of IFRS 13 Fair Value Measurement describes the use of Level 3 inputs for particular assets
and liabilities.
B36 Examples of Level 3 inputs for particular assets and liabilities include the following:
(a) Long-dated currency swap. A Level 3 input would be an interest rate in a specified currency that is
not observable and cannot be corroborated by observable market data at commonly quoted intervals or
otherwise for substantially the full term of the currency swap. The interest rates in a currency swap are
the swap rates calculated from the respective countries’ yield curves.
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(b) Three-year option on exchange-traded shares. A Level 3 input would be historical volatility, ie the
volatility for the shares derived from the shares’ historical prices. Historical volatility typically does
not represent current market participants’ expectations about future volatility, even if it is the only
information available to price an option.
(c) Interest rate swap. A Level 3 input would be an adjustment to a mid-market consensus (non-
binding) price for the swap developed using data that are not directly observable and cannot otherwise
be corroborated by observable market data.
(d) Decommissioning liability assumed in a business combination. A Level 3 input would be a current
estimate using the entity’s own data about the future cash outflows to be paid to fulfill the obligation
(including market participants’ expectations about the costs of fulfilling the obligation and the
compensation that a market participant would require for taking on the obligation to dismantle the
asset) if there is no reasonably available information that indicates that market participants would use
different assumptions. That Level 3 input would be used in a present value technique together with
other inputs, eg a current risk-free interest rate or a credit-adjusted risk-free rate if the effect of the
entity’s credit standing on the fair value of the liability is reflected in the discount rate rather than in
the estimate of future cash outflows.
(e) Cash-generating unit. A Level 3 input would be a financial forecast (eg of cash flows or profit or loss)
developed using the entity’s own data if there is no reasonably available information that indicates
that market participants would use different assumptions.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.86 - .90, Fair Value Measurement - Measurement - Fair Value Hierarchy - Level 3 Inputs
13.B36, Fair Value Measurement - Appendix B: Application Guidance - Fair Value Hierarchy - Level 3
Inputs
13.BC172 - .BC175, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value
Hierarchy - Level 3 Inputs
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U.S.: Level 3 Inputs
Level 3 Inputs (U.S. GAAP)
Summary Level 3 inputs are unobservable inputs that are used to estimate the fair value of the asset or liability.
Unobservable inputs should be used to measure fair value to the extent that relevant observable inputs are
not available allowing a fair value measurement in situations in which there is little, if any, market activity
for the asset or liability at the measurement date. Unobservable inputs should reflect the assumptions
(including assumptions about risk) that market participants would use when pricing the asset or liability.
Assumptions about risk include the risk inherent in a particular valuation technique (e.g., a pricing model)
and the risk inherent in the inputs to the valuation technique, if market participants would include an
assumption for risk when pricing the asset or liability.
A reporting entity should develop unobservable inputs using the best information available in the
circumstances, which might include the entity’s own data. When a reporting entity begins with its own data,
it should adjust the data if reasonably available information indicates that other market participants would
use different data or there is something particular to the reporting entity that is not available to other market
participants. A reporting entity should consider all information about market participant assumptions that
is reasonably available. Unobservable inputs developed in this manner are considered market participant
assumptions and meet the objective of a fair value measurement.
Paragraph 820-10-55-22 of Topic 820 Fair Value Measurement describes the use of Level 3 inputs for
particular assets and liabilities.
820-10-55-22 Examples of Level 3 inputs for particular assets and liabilities include the following:
a. Long-dated currency swap. A Level 3 input would be an interest rate in a specified currency that is
not observable and cannot be corroborated by observable market data at commonly quoted intervals or
otherwise for substantially the full term of the currency swap. The interest rates in a currency swap are
the swap rates calculated from the respective countries’ yield curves.
b. Three-year option on exchange-traded shares. A Level 3 input would be historical volatility, that is,
the volatility for the shares derived from the shares’ historical prices. Historical volatility typically
does not represent current market participants’ expectations about future volatility, even if it is the
only information available to price an option.
c. Interest rate swap. A Level 3 input would be an adjustment to a mid-market consensus (non-
binding) price for the swap developed using data that are not directly observable and cannot otherwise
be corroborated by observable market data.
d. Asset retirement obligation at initial recognition. A Level 3 input would be a current estimate using
the reporting entity’s own data about the future cash outflows to be paid to fulfill the obligation
(including market participants’ expectations about the costs of fulfilling the obligation and the
compensation that a market participant would require for taking on the asset retirement obligation) if
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there is no reasonably available information that indicates that market participants would use
different assumptions. That Level 3 input would be used in a present value technique together with
other inputs, for example, a current risk-free interest rate or a credit-adjusted risk-free rate if the
effect of the reporting entity’s credit standing on the fair value of the liability is reflected in the
discount rate rather than in the estimate of future cash outflows.
e. Cash-generating unit. A Level 3 input would be a financial forecast (for example, of cash flows or
earnings) developed using the reporting entity’s own data if there is no reasonably available
information that indicates that market participants would use different assumptions.
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary - Level 3 Inputs
35 Subsequent Measurement - Fair Value Hierarchy - Level 3 Inputs, paragraphs 35-52 through
35-54A
55 Implementation Guidance and Illustrations - Implementation Guidance - The Fair Value
Measurement Approach - Fair Value Hierarchy - Level 3 Inputs, paragraph 55-22
Other Guidance FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions
Application of Premiums and Discounts in a Fair Value Measurement, paragraphs BC73 through
BC80
Interpretations GAAP Financial Statement Disclosures Manual
Part 8 - Broad Transactions
Chapter 52: ASC Topic 820 – Fair Value Measurement
Examples of Financial Statement Disclosures
Example 4: Disclosure of Valuation Techniques and Inputs Used for Fair Value
Measurements Categorized Within Level 3 of the Fair Value Hierarchy—Illustration
Applicable Before and After Adoption of ASU No. 2016-01
Interpretations of Topic 820, “Fair Value Measurement”
B. The Fair Value Hierarchy
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Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - The Fair Value Hierarchy - Level 3 Inputs
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IAS/IFRS: Volume or Level of Activity Has Significantly Decreased
Volume or Level of Activity Has Significantly Decreased (IAS/IFRS)
Summary A significant decrease in the volume or level of activity for an asset or liability in relation to normal market
activity for the asset or liability (or similar assets or liabilities) may affect the fair value of that asset or
liability. A fair value measurement must determine whether, on the basis of the evidence available, there has
been a significant decrease in the volume or level of activity for the asset or liability, by evaluating the
significance and relevance of factors such as the following:
There are few recent transactions.
Price quotations are not developed using current information.
Price quotations vary substantially either over time or among market-makers.
Indices that previously were highly correlated with the fair values of the asset or liability are
demonstrably uncorrelated with recent indications of fair value for that asset or liability.
There is a significant increase in implied liquidity risk premiums, yields or performance indicators
(such as delinquency rates or loss severities) for observed transactions or quoted prices when
compared with the entity’s estimate of expected cash flows, taking into account all available market
data about credit and other non-performance risk for the asset or liability.
There is a wide bid-ask spread or significant increase in the bid-ask spread.
There is a significant decline in the activity of, or there is an absence of, a market for new issues (i.e., a
primary market) for the asset or liability or similar assets or liabilities.
Little information is publicly available.
If an entity determines that a transaction or quoted price does not represent fair value, an adjustment to the
transactions or quoted prices will be necessary if the entity uses those prices as a basis for measuring fair
value, and that adjustment may be significant to the fair value measurement in its entirety. Adjustments also
may be necessary in other circumstances such as when a price for a similar asset requires significant
adjustment to make it comparable to the asset being measured or when the price is stale.
An entity should include appropriate risk adjustments, including a risk premium reflecting the amount that
market participants would demand as compensation for the uncertainty inherent in the cash flows of an
asset or a liability regardless of the valuation technique used. The risk adjustment should be reflective of an
orderly transaction between market participants at the measurement date under current market conditions.
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A change in valuation technique or the use of multiple valuation techniques may be appropriate (e.g., the use
of a market approach and a present value technique) if there has been a significant decrease in the volume or
level of activity for the asset or liability. When weighting indications of fair value resulting from the use of
multiple valuation techniques, an entity should consider the reasonableness of the range of fair value
measurements. A wide range of fair value measurements may be an indication that further analysis is
needed.
An entity’s intention to hold the asset or to settle or otherwise fulfill the liability is not relevant when
measuring fair value because fair value is a market-based measurement, not an entity-specific
measurement.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.B37 - .B42, Fair Value Measurement - Appendix B: Application Guidance - Measuring Fair Value
When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased
13.IE48 - .IE58, Fair Value Measurement - Illustrative Examples – Measuring Fair Value when the
Volume or Level of Activity for an Asset or a Liability has Significantly Decreased - Example 14 –
Estimating a Market Rate of Return when the Volume or Level of Activity for an Asset has Significantly
Decreased
13.BC176 - .BC182, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value
Hierarchy - Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has
Significantly Decreased
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U.S.: Volume or Level of Activity Has Significantly Decreased
Volume or Level of Activity Has Significantly Decreased (U.S. GAAP)
Summary A significant decrease in the volume or level of activity for an asset or liability in relation to normal market
activity for the asset or liability (or similar assets or liabilities) may affect the fair value of that asset or
liability. A fair value measurement must determine whether, on the basis of the evidence available, there has
been a significant decrease in the volume or level of activity for the asset or liability, by evaluating the
significance and relevance of factors such as the following:
There are few recent transactions.
Price quotations are not developed using current information.
Price quotations vary substantially either over time or among market-makers.
Indices that previously were highly correlated with the fair values of the asset or liability are
demonstrably uncorrelated with recent indications of fair value for that asset or liability.
There is a significant increase in implied liquidity risk premiums, yields or performance indicators
(such as delinquency rates or loss severities) for observed transactions or quoted prices when
compared with the entity’s estimate of expected cash flows, taking into account all available market
data about credit and other non-performance risk for the asset or liability.
There is a wide bid-ask spread or significant increase in the bid-ask spread.
There is a significant decline in the activity of, or there is an absence of, a market for new issues (i.e., a
primary market) for the asset or liability or similar assets or liabilities.
Little information is publicly available.
If an entity determines that a transaction or quoted price does not represent fair value, an adjustment to the
transactions or quoted prices will be necessary if the entity uses those prices as a basis for measuring fair
value, and that adjustment may be significant to the fair value measurement in its entirety. Adjustments also
may be necessary in other circumstances such as when a price for a similar asset requires significant
adjustment to make it comparable to the asset being measured or when the price is stale.
An entity should include appropriate risk adjustments, including a risk premium reflecting the amount that
market participants would demand as compensation for the uncertainty inherent in the cash flows of an
asset or a liability regardless of the valuation technique used. The risk adjustment should be reflective of an
orderly transaction between market participants at the measurement date under current market conditions.
A change in valuation technique or the use of multiple valuation techniques may be appropriate (e.g., the use
of a market approach and a present value technique) if there has been a significant decrease in the volume or
level of activity for the asset or liability. When weighting indications of fair value resulting from the use of
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multiple valuation techniques, an entity should consider the reasonableness of the range of fair value
measurements. A wide range of fair value measurements may be an indication that further analysis is
needed.
An entity’s intention to hold the asset or to settle or otherwise fulfill the liability is not relevant when
measuring fair value because fair value is a market-based measurement, not an entity-specific
measurement.
U.S. GAAP Literature SEC Staff Views
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall, 35 Subsequent Measurement
Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has
Significantly Decreased, paragraphs 35-54C through 35-54H
55 Implementation Guidance and Illustrations - Illustrations - Example 8: Measuring Fair Value
When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased,
paragraphs 55-90 through 55-98
Interpretations Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - The Fair Value Hierarchy - Fair Value Measurement when the Volume or
Level of Activity has Significantly Decreased
Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
C-20. How Can One Determine If The Market is "Active" or "Inactive," and at What Point is An
Inactive Market So Inactive As to Make The Fair Value Estimate A Level 3 Category?
C-21. How Should Inactive Market Prices be Considered?
C-22. How Can One Determine Whether a Transaction is Orderly?
C-23. What Are the Effects of Distressed or Forced Sales on the Determination of Active Market
Values?
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C-24. When is The Market Price Considered "Stale," Requiring An Updated Estimate of Market
Participant Price, Assumptions, or Indices in The Valuation Model?
C-31. What Type of Guidance Is Provided to Define Inactive Markets, Orderly vs. Not Orderly, and
in Applying Level 3 Valuation Methods When There Is Evidence That the Market Is Not Orderly?
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IAS/IFRS: Transactions That are Not Orderly
Transactions That are Not Orderly (IAS/IFRS)
Summary An orderly transaction is a transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for transactions involving
such assets or liabilities; it is not a forced transaction (e.g., a forced liquidation or distress sale).
If there has been a significant decrease in the volume or level of activity for the asset or liability in relation to
normal market activity, the determination of whether a transaction is orderly or is not orderly is more
difficult. In such circumstances it is not appropriate to conclude that all transactions in that market are not
orderly. Circumstances that may indicate that a transaction is not orderly include the following:
There was not adequate exposure to the market for a period before the measurement date to allow for
marketing activities that are usual and customary for transactions involving such assets or liabilities
under current market conditions.
There was a usual and customary marketing period, but the seller marketed the asset or liability to a
single market participant.
The seller is in or near bankruptcy or receivership (i.e., the seller is distressed).
The seller was required to sell to meet regulatory or legal requirements (i.e., the seller was forced).
The transaction price is an outlier when compared with other recent transactions for the same or a
similar asset or liability.
All of the following should be considered when measuring fair value or estimating market risk premiums:
If the evidence indicates that a transaction is not orderly, an entity should place little, if any, weight
(compared with other indications of fair value) on that transaction price.
If the evidence indicates that a transaction is orderly, an entity should consider that transaction price.
The amount of weight placed on that transaction price when compared with other indications of fair
value will depend on the facts and circumstances.
If an entity does not have sufficient information to conclude whether a transaction is orderly, it should
consider the transaction price. However, that transaction price may not represent fair value. When an
entity does not have sufficient information to conclude whether particular transactions are orderly,
the entity should place less weight on those transactions when compared with other transactions that
are known to be orderly.
When an entity is a party to a transaction, it is presumed to have sufficient information to conclude whether
the transaction is orderly.
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IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.63, Fair Value Measurement - Measurement – Valuation Techniques
13.B43 - .B44, Fair Value Measurement - Appendix B: Application Guidance - Measuring Fair Value
When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased -
Identifying Transactions that are Not Orderly
13.BC181, Fair Value Measurement - Basis for Conclusions - Measurement - Fair Value Hierarchy -
Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has Significantly
Decreased
Interpretations Fair Value Measurement – Interpretations of IFRS 13
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U.S.: Transactions That are Not Orderly
Transactions That are Not Orderly (U.S. GAAP)
Summary An orderly transaction is a transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for transactions involving
such assets or liabilities; it is not a forced transaction (e.g., a forced liquidation or distress sale).
If there has been a significant decrease in the volume or level of activity for the asset or liability in relation to
normal market activity, the determination of whether a transaction is orderly or is not orderly is more
difficult. In such circumstances it is not appropriate to conclude that all transactions in that market are not
orderly. Circumstances that may indicate that a transaction is not orderly include the following:
There was not adequate exposure to the market for a period before the measurement date to allow for
marketing activities that are usual and customary for transactions involving such assets or liabilities
under current market conditions.
There was a usual and customary marketing period, but the seller marketed the asset or liability to a
single market participant.
The seller is in or near bankruptcy or receivership (i.e., the seller is distressed).
The seller was required to sell to meet regulatory or legal requirements (i.e., the seller was forced).
The transaction price is an outlier when compared with other recent transactions for the same or a
similar asset or liability.
All of the following should be considered when measuring fair value or estimating market risk premiums:
If the evidence indicates that a transaction is not orderly, an entity should place little, if any, weight
(compared with other indications of fair value) on that transaction price.
If the evidence indicates that a transaction is orderly, an entity should consider that transaction price.
The amount of weight placed on that transaction price when compared with other indications of fair
value will depend on the facts and circumstances.
If an entity does not have sufficient information to conclude whether a transaction is orderly, it should
consider the transaction price. However, that transaction price may not represent fair value. When an
entity does not have sufficient information to conclude whether particular transactions are orderly,
the entity should place less weight on those transactions when compared with other transactions that
are known to be orderly.
When an entity is a party to a transaction, it is presumed to have sufficient information to conclude whether
the transaction is orderly.
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U.S. GAAP Literature SEC Staff Views
Remarks by Muneera Carr, Fair Value Accounting (December 2008)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (March 2008)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
20 Glossary - Orderly Transaction
35 Subsequent Measurement - Valuation Techniques, paragraph 35-24B
35 Subsequent Measurement - Identifying Transactions That Are Not Orderly, paragraphs 35-54I
through 35-54J
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
C. Measurement of Fair Value
C-20. How Can One Determine If the Market Is "Active" or "Inactive," and at What Point Is an
Inactive Market So Inactive As to Make the Fair Value Estimate a Level 3 Asset or Liability?
C-21. How Should Inactive Market Prices be Considered?
C-22. How Can One Determine Whether a Transaction is Orderly?
C-23. What Are the Effects of Distressed or Forced Sales on the Determination of Active Market
Values?
C-24. When is The Market Price Considered "Stale," Requiring an Updated Estimate of Market
Participant Price, Assumptions, or Indices in The Valuation Model?
C-32. What Type of Guidance Is Provided to Define Inactive Markets, Orderly vs. Not Orderly, and
in Applying Level 3 Valuation Methods When There Is Evidence That the Market Is Not Orderly?
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IAS/IFRS: Third Party Quoted Prices
Third Party Quoted Prices (IAS/IFRS)
Summary Quoted prices provided by third parties may be used if an entity has determined that the quoted prices
provided by those parties are developed in accordance with IFRS 13 Fair Value Measurement .
If there has been a significant decrease in the volume or level of activity for the asset or liability, the quoted
prices provided by third parties should be reviewed to determine that they are developed using current
information that reflects orderly transactions or a valuation technique that reflects market participant
assumptions (including assumptions about risk). In weighting a quoted price as an input to a fair value
measurement, an entity places less weight on quotes that do not reflect the result of transactions when
compared with other indications of fair value that reflect the results of transactions.
Furthermore, the nature of a quote (e.g., whether the quote is an indicative price or a binding offer) should be
considered when weighting the available evidence, with more weight given to quotes provided by third
parties that represent binding offers.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.B34(c), Fair Value Measurement - Appendix B: Application Guidance – Inputs to Valuation
Techniques
13.B45 - .B47, Fair Value Measurement - Appendix B: Application Guidance - Measuring Fair Value
When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased - Using
Quoted Prices Provided by Third Parties
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U.S.: Third Party Quoted Prices
Third Party Quoted Prices (U.S. GAAP)
Summary Quoted prices provided by third parties may be used if an entity has determined that the quoted prices
provided by those parties are developed in accordance with Topic 820 Fair Value Measurement .
If there has been a significant decrease in the volume or level of activity for the asset or liability, the quoted
prices provided by third parties should be reviewed to determine that they are developed using current
information that reflects orderly transactions or a valuation technique that reflects market participant
assumptions (including assumptions about risk). In weighting a quoted price as an input to a fair value
measurement, an entity places less weight on quotes that do not reflect the result of transactions when
compared with other indications of fair value that reflect the results of transactions.
Furthermore, the nature of a quote (e.g., whether the quote is an indicative price or a binding offer) should be
considered when weighting the available evidence, with more weight given to quotes provided by third
parties that represent binding offers.
U.S. GAAP Literature SEC Staff Views
Remarks by Kris Shirley, ICFR for Fair Value Measurements for Illiquid Assets and Liabilities
(December 2015)
Remarks by Jason K. Plourde (December 2011)
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting
(September 2008)
Minutes of CAQ SEC Regulations Committee, VI. Validation of Quotes from Pricing Services on Level
2 Assets and Liabilities (September 27, 2011)
FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall, 35 Subsequent Measurement - Using Quoted Prices
Provided by Third Parties, paragraphs 35-54K through 35-54M
Interpretations Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - Pricing Services
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IAS/IFRS: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (IAS/IFRS)
Summary IFRS 13 Fair Value Measurement does not contain the practical expedient to estimate the fair value of an
investment using the net asset value per share (or its equivalent) of the investment, as permitted by U.S.
GAAP. Entities should follow the general discussion of fair value measurement and disclosures in this
chapter for investments in investment company entities
In the absence of IFRS that specifically apply to a transaction or industry issue, IFRS provides general
guidance for the selecting appropriate accounting principles. One option is to use U.S. GAAP guidance where
that addresses specific transactions or industry issues. However, an IFRS user can only use non-IFRS
standards after applying the following hierarchy discussed in paragraphs 7 through 12 in IAS 8, Accounting
Policies, Changes in Accounting Estimates and Errors.
The hierarchy requires selecting the accounting principles in the following order:
Apply specific IFRS standard or interpretation where possible.
Refer to other IFRS standards and interpretations dealing with similar transactions.
Refer to the IFRS framework and the definitions of elements of the financial statements to guide the
principles used to account for the transaction.
Consider the accounting guidelines found in other sets of accounting or standards that are based on a
conceptual framework or industry practices that are consistent with the above. This explicitly allows
IFRS users to look to recent guidance issued by other standard setters (arguably the FASB setting U.S.
GAAP) and accepted industry practices) where IFRS does not provide such guidance.
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U.S.: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (U.S. GAAP)
Summary An investor may invest in entities (investees) that permit the investor to redeem its investments directly
with the investee or receive distributions from the investee at times specified under the terms of the
investee’s governing documents. Many of these investments do not have readily determinable fair values (as
defined) because those investments are not listed on national exchanges or over-the-counter markets.
Examples of these investees include hedge funds, private equity funds, real estate funds, venture capital
funds, offshore fund vehicles, and funds of funds. Many of these investees provide their investors with a net
asset value per share (or its equivalent, for example, member units or an ownership interest in partners’
capital to which a proportionate share of net assets is attributed) that has been calculated in a manner
consistent with investment companies which measure their underlying investments at fair value.
This discussion applies only to an investment that meets both of the following criteria as of the reporting
entity’s measurement date:
The investment does not have readily determinable fair value; and
The investment is in an investment company or is an investment in a real estate fund for which it is
industry practice to measure investment assets at fair value on a recurring basis and to issue financial
statements that are consistent with investment company measurement principles (see the “10 Overall
” section of the 946 Financial Services – Investment Companies chapter).
An equity security has a readily determinable fair value if it meets any of the following conditions:
The sales prices or bid-and-asked quotations are currently available on a securities exchange
registered with the Securities and Exchange Commission or in the over-the-counter market, provided
that those prices or quotations for the over-the-counter market are publicly reported by the National
Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc.
Restricted stock meets that definition if the restriction terminates within one year.
An equity security traded only in a foreign market if that foreign market is of a breadth and scope
comparable to one of the U.S. markets referred to above.
An investment in a mutual fund if the fair value per share (unit) is determined and published and is the
basis for current transactions.
An investment for which fair value is measured using net asset value per share (or its equivalent, e.g.
member units or an ownership interest in partners’ capital to which a proportionate share of net assets is
attributed) as a practical expedient should not be categorized within the fair value hierarchy. In addition, the
disclosure requirements in paragraph 820- 10-50-2 do not apply to that investment. Although the
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investment is not categorized within the fair value hierarchy, a reporting entity should provide the amount
measured using the net asset value per share (or its equivalent) practical expedient to permit reconciliation
of the fair value of investments included in the fair value hierarchy to the line items presented in the
statement of financial position.
Practical Expedient
A reporting entity is permitted, as a practical expedient, to estimate the fair value of an investment using the
net asset value per share (or its equivalent) of the investment, if the net asset value per share of the
investment (or its equivalent) is calculated in a manner consistent with the investment company
measurement principles as of the reporting entity’s measurement date.
If the net asset value per share of the investment obtained from the investee is not as of the reporting
entity’s measurement date or is not calculated in a manner consistent with the investment company
measurement principles, the reporting entity should consider whether an adjustment to the most recent net
asset value per share is necessary. The objective of any adjustment is to estimate a net asset value per share
for the investment that is calculated in a manner consistent with the investment company measurement
principles as of the reporting entity’s measurement date.
A reporting entity is not permitted to estimate the fair value of an investment (or a portion of the
investment) using the net asset value per share of the investment (or its equivalent) as a practical expedient
if, as of the reporting entity’s measurement date, it is probable that the reporting entity will sell the
investment for an amount different from the net asset value per share (or its equivalent). A sale is
considered probable only if all of the following criteria have been met as of the reporting entity’s
measurement date:
Management, having the authority to approve the action, commits to a plan to sell the investment.
An active program to locate a buyer and other actions required to complete the plan to sell the
investment have been initiated.
The investment is available for immediate sale subject only to terms that are usual and customary for
sales of such investments (e.g., a requirement to obtain approval of the sale from the investee or a
buyer’s due diligence procedures).
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn.
Disclosure
For investments that are within the scope of this discussion and that are measured using the practical
expedient in paragraph 820-10-35-59 on a recurring or nonrecurring basis during the period, a reporting
entity shall disclose information that helps users of its financial statements to understand the nature and
risks of the investments and whether the investments, if sold, are probable of being sold at amounts
different from net asset value per share (or its equivalent, such as member units or an ownership interest in
partners’ capital to which a proportionate share of net assets is attributed). A reporting entity shall disclose
the following information for each class of investment:
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a. The fair value measurement (as determined by applying paragraphs 820-10-35-59 through 35-62) of
the investments in the class at the reporting date and a description of the significant investment
strategies of the investee(s) in the class.
b. For each class of investment that includes investments that can never be redeemed with the investees,
but the reporting entity receives distributions through the liquidation of the underlying assets of the
investees, the period of time over which the underlying assets are expected to be liquidated by the
investees if the investee has communicated the timing to the reporting entity or announced the timing
publicly. If the timing is unknown, the reporting entity shall disclose that fact.
c. The amount of the reporting entity’s unfunded commitments related to investments in the class.
d. A general description of the terms and conditions upon which the investor may redeem investments in
the class (for example, quarterly redemption with 60 days’ notice).
e. The circumstances in which an otherwise redeemable investment in the class (or a portion thereof)
might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise
redeemable investments that are restricted from redemption as of the reporting entity’s measurement
date, the reporting entity shall disclose when the restriction from redemption might lapse if the investee
has communicated that timing to the reporting entity or announced the timing publicly. If the timing is
unknown, the reporting entity shall disclose that fact and how long the restriction has been in effect.
f. Any other significant restriction on the ability to sell investments in the class at the measurement date.
g. If a group of investments would otherwise meet the criteria in paragraph 820-10-35-62 but the
individual investments to be sold have not been identified (for example, if a reporting entity decides to
sell 20 percent of its investments in private equity funds but the individual investments to be sold have
not been identified), so the investments continue to qualify for the practical expedient in paragraph 820-
10-35-59, the reporting entity shall disclose its plans to sell and any remaining actions required to
complete the sale(s).
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall
15 Scope and Scope Exceptions - Other Considerations - Fair Value Measurements of
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),
paragraphs 15-4 through 15-5
20 Glossary – Readily Determinable Fair Value
35 Subsequent Measurement - Fair Value Hierarchy - Categorizing Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent) within the Fair Value
Hierarchy, paragraph 35-54B
35 Subsequent Measurement - Measuring the Fair Value of Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), paragraphs 35-59 through 35-62
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50 Disclosure - Fair Value Measurements of Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent), paragraph 50-6A
55 Implementation Guidance and Illustrations - Illustrations - Example 9: Fair Value Disclosures
- Case D: Disclosure-Fair Value Measurements of Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent), paragraph 55-107
65 Transition and Open Effective Date Information – Fair Value Measurement (Topic 820):
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent), paragraph 65-10
65 Transition and Open Effective Date Information - Transition Related to Accounting Standards
Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement, paragraph 65-12
Other Guidance AICPA - Technical Questions and Answers
Section 2220: Long-Term Investments
.18 Applicability of Practical Expedient
.19 Unit of Account
.20 Determining Whether NAV Is Calculated Consistent With FASB ASC 946, "Financial Services
—Investment Companies"
.21 Determining Whether an Adjustment to NAV Is Necessary
.22 Adjusting NAV When It Is Not as of the Reporting Entity’s Measurement Date
.23 Adjusting NAV When It Is Not Calculated Consistent With FASB ASC 946
.24 Disclosures—Ability to Redeem Versus Actual Redemption Request
.25 Impact of “Near Term” on Classification Within Fair Value Hierarchy
.26 Categorization of Investments for Disclosure Purposes
.27 Determining Fair Value of Investments When the Practical Expedient Is Not Used or Is Not
Available
FASB ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement
FASB ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
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FASB ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
Interpretations Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 19: Fair Value Measurements
Application Guidance - Fair Value Measurement of Certain Investments Based on Net Asset Value
per Share
Part V: Pervasive Issues - Chapter 21: Financial Instrument Disclosures
Assets and Liabilities Measured at Fair Value - Disclosures about Fair Value Measurement of
Certain Investments Based on Net Asset Value per Share
GAAP Financial Statement Disclosures Manual
Part 8 - Broad Transactions
Chapter 52: ASC Topic 820 – Fair Value Measurement
Examples of Financial Statement Disclosures
Example 6: Disclosure of Fair Value Measurements of Investments That Are Measured at
Net Asset Value per Share (or Its Equivalent, Such as Member Units) As a Practical Expedient
—Illustration Applicable Based on Guidance in ASU No. 2015-07
Interpretations of Topic 820, “Fair Value Measurements and Disclosures”
A. Overview and Scope of Topic 820
A-13. What Are the Key Fair Value Measurement Requirements in Topic 820 for Investments in
Entities that Calculate Net Asset Value Per Share?
D. Disclosure Requirements under Topic 820
D-16. There Specific Disclosure Requirements and Guidance for Net Asset Value Per Share
Measurements?
D-17. What Types of Entities and Financial Statements Are Most Affected by Net Asset Value Per
Share (or Its Equivalent) Measurements?
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IAS/IFRS: Disclosure
Disclosure (IAS/IFRS)
Summary The disclosure principle in IFRS 13 Fair Value Measurement is as follows:
91 An entity shall disclose information that helps users of its financial statements assess both of the
following:
(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the
statement of financial position after initial recognition, the valuation techniques and inputs used to
develop those measurements.
(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of
the measurements on profit or loss or other comprehensive income for the period.
To meet the disclosure objectives, a reporting entity should consider all of the following: (a) the level of
detail necessary to meet the disclosure requirements; (b) the amount of emphasis to place on each of the
various requirements; (c) the amount of aggregation or disaggregation to provide; and (d) whether additional
disclosure is necessary for users to evaluate the quantitative information presented. If the disclosures
provided are insufficient to meet the disclosure objectives, additional information should be presented as
necessary to meet the objectives.
Specific disclosure requirements are included in IFRS 13 along with illustrative disclosure examples (as
referenced below).
The entity is required to report the assets and liabilities in each level of the hierarchy, levels 1, 2, and 3. For
level 2 and 3 assets and liabilities, the method of measuring fair value is required to be disclosed. For level 3
assets and liabilities, the amounts or each type of asset and liability that are transferred from one level and to
another level is required to be disclosed. Such transfers have been common for many financial instruments
during the financial crisis ranging from auction rate securities that have moved from level 1 to level 2 to level
3 as the markets became inactive and to sovereign debt that has moved from level 1 to level 2 for some
countries. The presentation of these transfers is organized via recommended tables that are described in
IFRS 13. Substantial additional information about inputs used, reason for transfer between levels, and
information about sensitivity to the estimated inputs is also required. A tabular summary of assets and
liabilities in each level is also explicitly required.
A detailed example of the tabular presentation of assets and liabilities in the fair value hierarchy is in
Examples 16 , 17 and 18 in the IFRS 13 Illustrative Examples.
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
13.91 - .99, Fair Value Measurement - Disclosure
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13.BC183 - .BC224, Fair Value Measurement - Basis for Conclusions - Disclosure
13.IE59, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures
13.IE60, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures - Example 15-
Assets Measured at Fair Value
13.IE61 - .IE62, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures -Example
16: Reconciliation of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy
13.IE63 - .IE64, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures -Example
17: Valuation Techniques and Inputs
13.IE65, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures - Example 18:
Valuation Processes
13.IE66, Fair Value Measurement - Illustrative Examples - Fair Value Disclosures - Example 19:
Information about Sensitivity to Changes in Significant Unobservable Inputs
Interpretations International Accounting/Financial Reporting Standards Guide
Part I: Overview
Chapter 3: Fair Value Measurement
Application - Disclosure
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U.S.: Disclosure
Disclosure (U.S. GAAP)
Summary The fair value disclosure objective is to provide users of financial statements with information about assets
and liabilities measured at fair value in the statement of financial position or disclosed in the notes to
financial statements:
a. The valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value,
including judgments and assumptions that the entity makes.
b. The uncertainty in the fair value measurements as of the reporting date.
c. How changes in fair value measurements affect an entity’s performance and cash flows.
To meet the disclosure objectives, a reporting entity should consider all the following:
a. The level of detail necessary to satisfy the disclosure requirements.
b. How much emphasis to place on each of the various requirements.
c. How much aggregation or disaggregation to undertake.
d. Whether users of financial statements need additional information to evaluate the quantitative
information disclosed.
The specific disclosure requirements to meet these objectives, and implementation guidance and disclosure
illustrations are included in the references below.
For the complete financial statement disclosure requirements applicable to fair value, see the relevant
sections of the General U.S. GAAP Financial Statement Disclosures Checklist and the SEC Financial Statement
Disclosures Checklist .
U.S. GAAP Literature SEC Staff Views
Remarks by Stephanie L. Hunsaker, Fair Value: Best Practices for MD&A Disclosure (December
2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (September 2008)
Letter from the Senior Assistant Chief Accountant, Sample Letter Sent to Public Companies on
MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements) (March 2008)
FASB Accounting Standards Codification
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820, Fair Value Measurement, 10 Overall
50 Disclosure
General, paragraphs 50-1 through 50-3
Liability Issued with an Inseparable Third-Party Credit Enhancement, paragraph 50-4A
Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent), paragraph 50-6A
Equity Securities Subject to Contractual Sale Restrictions, paragraph 50-6B
Changes in Valuation Techniques or Their Application, paragraph 50-7
Tabular Format Required, paragraph 50-8 through 50-10
55 Implementation Guidance and Illustrations - Illustrations
Example 9: Fair Value Disclosures
Case A: Disclosure—Assets Measured at Fair Value, paragraph 55-100
Case B: Disclosure—Reconciliation of Fair Value Measurements Categorized within Level 3
of the Fair Value Hierarchy, paragraphs 55-101 through 55-102
Case C: Disclosure—Information about Fair Value Measurements Categorized within Level 3
of the Fair Value Hierarchy
Valuation Techniques and Inputs, paragraphs 55-103 through 55-104
Information about Sensitivity to Changes in Significant Unobservable Inputs,
paragraph 55-106
Case D: Disclosure—Fair Value Measurements of Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), paragraph 55-107
65 Transition and Open Effective Date Information - Transition Related to Accounting Standards
Update No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain
Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, paragraph 65-9
65 Transition and Open Effective Date Information - Transition Related to Accounting Standards
Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement, paragraph 65-12
Other Guidance AICPA - Technical Questions and Answers
Section 1800: Notes to Financial Statements
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.05 Applicability of Fair Value Disclosure Requirements and Measurement Principles in Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value
Measurements and Disclosures, to Certain Financial Instruments
.06 Applicability of Fair Value Disclosure Requirements in FASB ASC 820 to Financial Statements
Prepared in Accordance With a Special Purpose Framework
Section 2130: Receivables
.38 Certificates of Deposit and FASB ASC 820, "Fair Value Measurements and Disclosures"
Section 6931: Financial Statement Reporting and Disclosure – Employee Benefit Plans
.11 Fair Value Measurement Disclosures for Master Trusts
FASB ASU No. 2011-04, Fair Value Measurement (Topic 820)
Background Information and Basis for Conclusions - Disclosure
Information about Fair Value Measurements Categorized within Level 3 of the Fair Value
Hierarchy, paragraphs BC82 through BC98
Transfers between Levels 1 and 2 of the Fair Value Hierarchy, paragraphs BC99 through BC100
When a Reporting Entity Uses a Nonfinancial Asset in a Way That Differs from its Highest and
Best Use, paragraphs BC101 through BC102
The Categorization within the Level of the Fair Value Hierarchy for Items That Are Not Measured
at Fair Value in the Statement of Financial Position, paragraphs BC103 through BC105
Application to Nonpublic Entities, paragraphs BC106 through BC107
FASB ASU No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of
Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04
FASB ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement
FASB ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-
for-Profit Entities for Contributed Nonfinancial Assets
FASB ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions
Interpretations Interpretations of Topic 820, “Fair Value Measurement”
D. Disclosure Requirements Under Topic 820
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Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
Financial Instruments
Part V: Pervasive Issues - Chapter 21: Financial Instrument Disclosures
Assets and Liabilities Measured at Fair Value
Illustrations - Illustration 21-1: Assets Measured at Fair Value
Illustrations – Illustration 21-2: Fair Value Disclosures by a Financial Entity
GAAP Financial Statement Disclosures Manual
Part 8 - Broad Transactions
Chapter 52: ASC Topic 820 – Fair Value Measurement
Disclosure and Key Presentation Requirements
Examples of Financial Statement Disclosures
Example 1: General Accounting Policy Disclosure for Fair Value of Financial Instruments
Example 2: Tabular Presentation of Assets and Liabilities That Are Measured at Fair Value
—Illustration Applicable Prior to Implementation of Guidance in ASU No. 2016-01
Example 3: Tabular Presentation of Assets and Liabilities That Are Measured at Fair Value
—Illustration Applicable Based on Guidance in ASU No. 2016-01
Example 4: Disclosure of Valuation Techniques and Inputs Used for Fair Value
Measurements Categorized Within Level 3 of the Fair Value Hierarchy—Illustration
Applicable Before and After Adoption of ASU No. 2016-01
Example 6: Disclosure of Fair Value Measurements of Investments That Are Measured at
Net Asset Value per Share (or Its Equivalent, Such as Member Units) As a Practical Expedient
—Illustration Applicable Based on Guidance in ASU No. 2015-07
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IAS/IFRS: Illustrations
Illustrations (IAS/IFRS)
Summary The following illustrative examples accompany IFRS 13 Fair Value Measurement .
IAS/IFRS Literature International Financial Reporting Standards (IFRS)
Fair Value Measurement - Illustrative Examples
13.IE2, Highest and Best Use and Valuation Premise
13.IE3 - .IE6, Example 1: Asset Group
13.IE7 - .IE8, Example 2: Land
13.IE9, Example 3: Research and Development Project
13.IE10, Use of Multiple Valuation Techniques
13.IE11 - .IE14, Example 4: Machine Held and Used
13.IE15 - .IE17, Example 5: Software Asset
13.IE18, Principal (or Most Advantageous) Market
13.IE19 - .IE22, Example 6: Level 1 Principal (or Most Advantageous) Market
13.IE23, Transaction Prices and Fair Value at Initial Recognition
13.IE24 - .IE26, Example 7: Interest Rate Swap at Initial Recognition
13.IE27, Restricted Assets
13.IE28, Example 8: Restriction on the Sale of an Equity Instrument
13.IE29, Example 9: Restrictions on the Use of an Asset
13.IE30-.IE33, Measuring Liabilities
13.IE34, Example 10: Structured Note
13.IE35 - .IE39, Example 11: Decommissioning Liability
13.IE40 - .IE42, Example 12: Debt Obligation - Quoted Price
13.IE43 - .IE47, Example 13: Debt Obligation - Present Value Technique
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13.IE48, Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability has
Significantly Decreased
13.IE49 - .IE58, Example 14: Estimating a Market Rate of Return When the Volume or Level of
Activity for an Asset has Significantly Decreased
13.IE59, Fair Value Disclosures
13.IE60, Example 15: Assets Measured at Fair Value
13.IE61 - .IE62, Example 16: Reconciliation of Fair Value Measurements Categorized within
Level 3 of the Fair Value Hierarchy
13.IE63 - .IE64, Example 17: Valuation Techniques and Inputs
13.IE65, Example 18: Valuation Processes
13.IE66, Example 19: Information about Sensitivity to Changes in Significant Unobservable
Inputs
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U.S.: Illustrations
Illustrations (U.S. GAAP)
Summary Several illustrations about fair value measurement and disclosure may be found in the U.S. GAAP literature
and interpretations referenced below.
U.S. GAAP Literature FASB Accounting Standards Codification
820, Fair Value Measurement, 10 Overall, 55 Implementation Guidance and Illustrations - Illustrations
Example 1: Highest and Best Use and Valuation Premise, paragraph 55-25
Case A: Asset Group, paragraphs 55-26 through 55-29
Case B: Land, paragraphs 55-30 through 55-31
Case C: In-Process Research and Development Project, paragraph 55-32
Example 2: Discount Rate Adjustment Technique - The Build-Up Approach, paragraphs 55-33
through 55-34
Example 3: Use of Multiple Valuation Techniques, paragraph 55-35
Case A: Machine Held and Used, paragraphs 55-36 through 55-38A
Case B: Software Asset, paragraphs 55-39 through 55-41
Example 4: Level 1 Principal (or Most Advantageous) Market, paragraphs 55-42 through 55-45A
Example 5: Transaction Prices and Fair Value at Initial Recognition—Interest Rate Swap at Initial
Recognition, paragraphs 55-46 through 55-49
Example 6: Restricted Assets, paragraph 55-51
Case A: Restriction of Sale of Security, paragraphs 55-52 through 55-53
Case B: Restrictions of Use Asset, paragraphs 55-54 through 55-55
Example 7: Measuring Liabilities, paragraphs 55-55A through 55-56
Case A: Liabilities and Credit Risk - General, paragraphs 55-57 through 55-57A
Case B: Structured Note, paragraphs 55-58 through 55-59
Case C: Asset Retirement Obligation, paragraphs 55-77 through 55-81
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Case D: Debt Obligation - Quoted Price, paragraphs 55-82 through 55-84
Case E: Debt Obligation - Present Value Technique, paragraphs 55-85 through 55-89
Example 8: Measuring Fair Value When the Volume and Level of Activity for an Asset or a
Liability Has Significantly Decreased, paragraphs 55-90 through 55-98
Example 9: Fair Value Disclosures, paragraph 55-99
Case A: Disclosure—Assets Measured at Fair Value, paragraph 55-100
Case B: Disclosure—Reconciliation of Fair Value Measurements Categorized within Level 3 of
the Fair Value Hierarchy, paragraphs 55-101 through 55-102
Case C: Disclosure—Information about Fair Value Measurements Categorized within Level 3 of
the Fair Value Hierarchy
Valuation Techniques and Inputs, paragraphs 55-103 through 55-104
Valuation Processes, paragraph 55-105
Information about Sensitivity to Changes in Significant Unobservable Inputs, paragraph
55-106
Case D: Disclosure—Fair Value Measurements of Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), paragraph 55-107
Other Guidance FASB ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions
Interpretations Accounting for Business Combinations, Goodwill, and Other Intangible Assets - Interpretations of
U.S. and International Accounting Standards
Business Combinations - Identifiable Assets and Liabilities, and Any Noncontrolling Interest (805-20)
Paragraphs 805-20-30-1 through 30-6: Initial Measurement - General
805-20-30-1.K: Fair Value Measurements for Intangible Assets Other Than Goodwill
Fair Value Accounting: Measurement, Disclosure, and the Fair Value Option
GAAP Financial Statement Disclosures Manual
Part 8 - Broad Transactions
Chapter 52: ASC Topic 820 – Fair Value Measurement
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Examples of Financial Statement Disclosures
Example 1: General Accounting Policy Disclosure for Fair Value of Financial Instruments
Example 2: Tabular Presentation of Assets and Liabilities That Are Measured at Fair Value
—Illustration Applicable Prior to Implementation of Guidance in ASU No. 2016-01
Example 3: Tabular Presentation of Assets and Liabilities That Are Measured at Fair Value
—Illustration Applicable Based on Guidance in ASU No. 2016-01
Example 4: Disclosure of Valuation Techniques and Inputs Used for Fair Value
Measurements Categorized Within Level 3 of the Fair Value Hierarchy—Illustration
Applicable Before and After Adoption of ASU No. 2016-01
Example 6: Disclosure of Fair Value Measurements of Investments That Are Measured at
Net Asset Value per Share (or Its Equivalent, Such as Member Units) As a Practical Expedient
—Illustration Applicable Based on Guidance in ASU No. 2015-07
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IAS/IFRS: Fair Value Measurement – Broker and Dealers
940 Financial Services - Broker and Dealers
Fair Value Measurement – Broker and Dealers (IAS/IFRS)
Summary International Financial Reporting Standards do not provide specific fair value guidance for entities that are
brokers and dealers in securities. These entities should follow the same accounting principles applicable to
other entities.
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U.S.: Fair Value Measurement – Broker and Dealers
940 Financial Services - Broker and Dealers
Fair Value Measurement – Broker and Dealers (U.S. GAAP)
Summary For incremental guidance related to specific issues of fair value measurement for broker-dealers, see the
“820 Fair Value Measurement ” section of the 940 Financial Services − Brokers and Dealers chapter.
https://www-accountingresearchmanager- com.mimas.calstatela.edu/#/combined/5ADE6A008EB80E9E65257559001EFA2BTOC/accounting/arm/accounting- standards/820-fair-value-measurement/arm-as-820-fair-value-measurement
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