Perspectives

Fair value measurements and disclosures

On the Radar: Financial reporting impacts of ASC 820

Applying fair value measurements (including the fair value option) and meeting disclosure requirements can be complicated. And that’s after the challenge of determining whether measurement is even required under US GAAP. Let’s break down ASC 820 and the seven steps you can take to prepare a fair value measurement and meet disclosure requirements.

ASC 820 and fair value measurements and disclosures

Most entities have amounts that are recognized at fair value in their financial statements. ASC 820 defines fair value, sets out a framework for measuring it, and establishes fair value disclosure requirements. However, ASC 820 does not specify when an entity is required or permitted to measure assets, liabilities, equity instruments, or transactions at fair value; this requirement is addressed in other US GAAP.

 

Framework to measure and disclose fair value

The fair value measurement guidance was originally issued in September 2006. Although it has been subsequently amended since its original issuance, the general framework has not changed, and significant future changes are not expected. An entity needs to perform various steps to (1) prepare a fair value measurement that complies with the measurement principles in ASC 820 and (2) meet the disclosure requirements in ASC 820. An entity may apply the following step-by-step approach to measure and disclose fair value when the initial or subsequent measurement of an asset, liability, or equity instrument at fair value is required or permitted by other US GAAP:

On the Radar: Fair value measurements and disclosures (including the fair value option)

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Fair value measurement application framework:

Common misconception
A fair value measurement is a market-based measurement based on an exit price notion and is not entity-specific. Therefore, a fair value measurement must be determined on the basis of the assumptions that market participants would use in pricing an item, regardless of whether those assumptions are observable or unobservable. A measurement based on “true value,” “economic value,” or management’s perception of value is not consistent with a fair value measurement. The fair value hierarchy in ASC 820 serves as a basis for considering market-participant assumptions and distinguishes between.

  1. Market-participant assumptions developed on the basis of market data that are independent of the entity (observable inputs), and;
  2. An entity’s own assumptions about market-participant assumptions developed on the basis of the best information available in the particular circumstances, including assumptions about the risks inherent in inputs or valuation techniques.

As is evident in its comment letters on registrants’ filings, the SEC staff closely scrutinizes the fair value disclosures provided by entities, focusing on missing or confusing disclosures. The staff often will request entities to modify or supplement disclosures.

Items required or eligible to be measured at fair value

With certain exceptions, the measurement guidance in ASC 820 applies whenever another Codification topic uses the phrase “fair value” to describe how an entity is required or permitted to measure financial and nonfinancial assets and liabilities, instruments classified in a reporting entity’s stockholders’ equity, or specific transactions, regardless of whether this measurement pertains to initial or subsequent recognition or to disclosure. Therefore, before applying the fair value measurement framework in ASC 820, entities must determine whether fair value measurement under ASC 820 is required or permitted by other US GAAP.

In addition, certain Codification topics permit, but do not require, an entity to measure an asset or liability at fair value. Most notably, ASC 825 permits entities to elect the fair value option to account for certain financial assets and financial liabilities at fair value. Entities may also elect to account for certain assets or liabilities, including nonfinancial items, at fair value according to other Codification topics (e.g., ASC 860-50 permits entities to recognize servicing assets and servicing liabilities at fair value). Any measurement of an item at fair value must be performed in accordance with ASC 820 unless the use of another measurement approach is specifically required by US GAAP.

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Learn more about fair value measurements and disclosures

Deloitte’s Roadmap Fair value measurements and disclosures (including the fair value option) comprehensively discusses the scope, measurement, and disclosure guidance in ASC 820 and other US GAAP.

This Roadmap is intended to help entities navigate the accounting guidance related to fair value measurements and disclosures, reduce complexity, and arrive at appropriate accounting conclusions.

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