A Guide to Complying with the ASC 820 Fair Value Measurement

Fair value measurement is important in financial reporting because it provides investors and other stakeholders with a more accurate picture of a company’s financial position and performance. It is also used in other contexts, such as mergers and acquisitions, to determine the value of a company or its assets.

Did you know that Fair Value measurement helps investors and other stakeholders have a more accurate picture of a company’s financial position and performance?

Fair Value is also used in other contexts, such as mergers and acquisitions, to determine the value of a company or its assets.

Want to learn more about ASC 820? Read this helpful guide for more information on how ASC 820 impacts tangible and intangible asset valuations.

What Is Fair Value Measurement?

Fair value measurement is a financial accounting term that refers to the process of determining the value of an asset or liability in a market transaction. It is used in financial reporting to ensure that financial statements accurately reflect the economic value of a company’s assets and liabilities.

The concept of fair value measurement is important in financial reporting because it provides investors and other stakeholders with a more accurate picture of a company’s financial position and performance. It is also used in other contexts, such as mergers and acquisitions – under ASC 805 -, to determine the value of a company or its assets.

What Is ASC 820?

ASC 820 is a Financial Accounting Standards Board (FASB) Accounting Standards Codification that provides guidance on the measurement and disclosure of fair value for financial reporting purposes. It defines fair value 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.

Disclosures

ASC 820 requires entities to provide certain disclosures about the fair value measurements of their assets and liabilities. This allows the company’s management and investors to verify and analyze the inputs used in determining the fair value measurements, which may determine the entity’s financial position and performance.

Below presents the disclosures required by ASC 820:

  1. A description of the valuation techniques used to determine fair value measurements, as well as the level of the fair value hierarchy within which each measurement falls.
  2. The significant inputs used to determine the fair value measurements, including any assumptions and estimates made by management.
  3. For Level 3 fair value measurements, a reconciliation of the beginning and ending balances, including any purchases, sales, issuances, and settlements during the period.
  4. For assets and liabilities measured at fair value on a recurring basis, the quantitative information about the unobservable inputs used in Level 3 fair value measurements, as well as the range and weighted average of significant unobservable inputs.
  5. For assets and liabilities measured at fair value on a nonrecurring basis, a description of the nature of the asset or liability and the reasons for the measurement.
  6. A discussion of the sensitivity of fair value measurements to changes in inputs and market conditions.
  7. The amount of gains or losses recognized on the sale or transfer of assets or liabilities measured at fair value.

How do ASC 820 and IFRS 13 differ in their disclosure requirements?

ASC 820 and IFRS 13 have some differences in their disclosure requirements related to fair value measurements. Some of the key differences are:

  1. Level of detail: IFRS 13 requires a greater level of detail in the disclosure of fair value measurements compared to ASC 820. For example, IFRS 13 requires entities to disclose the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements, whereas ASC 820 does not.
  2. Sensitivity analysis: IFRS 13 requires entities to provide sensitivity analysis for each class of assets and liabilities measured at fair value, including the effect of changes in unobservable inputs. ASC 820 requires sensitivity analysis only for Level 3 fair value measurements.
  3. Use of market data: IFRS 13 requires entities to disclose the extent to which they have used market data to determine fair value, whereas ASC 820 does not explicitly require this disclosure.
  4. Business combinations: IFRS 13 requires entities to disclose the fair value of assets and liabilities acquired in a business combination, whereas ASC 820 does not have specific requirements for business combinations.
  5. Valuation process: IFRS 13 requires entities to disclose information about the valuation process, including any changes made to valuation techniques and assumptions, whereas ASC 820 does not have specific requirements for this disclosure.

IFRS 13 requires more extensive disclosure related to fair value measurements than ASC 820. However, both standards require entities to provide transparency and insight into the fair value measurements used in financial reporting, including the inputs and assumptions used, the methods used to determine fair value, and the effect of fair value measurements on the financial statements.

How do companies determine the Fair Value of their assets and liabilities under ASC 820?

Companies determine the fair value of their assets and liabilities under ASC 820 by using various valuation techniques and methods that are appropriate for the type of asset or liability being valued. The following are some common methods used to determine fair value:

  1. Market approach: This method uses market data, such as prices for similar assets or liabilities, to determine fair value. The market approach is often used for Level 1 and Level 2 assets and liabilities.
  2. Income approach: This method uses the present value of future cash flows to determine fair value. It is often used for Level 3 assets and liabilities, where market data is not readily available.
  3. Cost approach: This method uses the cost to replace or reproduce an asset or liability to determine fair value. It is often used for assets or liabilities that are unique and not traded in an active market.

Companies may also use a combination of methods or adjust their valuation techniques based on the characteristics of the asset or liability being valued. Notice that fair value measurements require assumptions and estimates, and these may be subjective, which means that companies should exercise professional judgment and use reliable information in determining the fair value of their assets and liabilities. Also, companies may engage the services of independent valuation experts to assist with the fair value measurement process.

How do companies determine the Fair Value of their assets and liabilities under ASC 820?

Under ASC 820, management plays a critical role in determining fair value measurements for assets and liabilities. Management is responsible for selecting the valuation methods and assumptions used to determine fair value, as well as for ensuring that the fair value measurements are consistent with the definition of fair value and the fair value hierarchy established by the standard.

Specifically, management’s responsibilities related to fair value measurements under ASC 820 include:

  1. Selecting appropriate valuation methods: Management is responsible for selecting the appropriate valuation methods for each asset or liability, considering factors such as the nature of the asset or liability, the availability of market data, and the significance of unobservable inputs.
  2. Determining significant inputs: Management must identify the significant inputs used to measure fair value for each asset or liability, including both observable and unobservable inputs.
  3. Assessing the reliability of inputs: Management must assess the reliability of each input used to measure fair value, considering factors such as the quality and availability of data, the consistency of data, and the credibility of the source of the data.
  4. Applying adjustments: Management must apply adjustments to fair value measurements as necessary to reflect the specific characteristics of the asset or liability being measured, such as liquidity, restrictions on sale, or changes in market conditions.
  5. Ensuring consistency: Management must ensure that fair value measurements are consistent with the definition of fair value and the fair value hierarchy established by ASC 820, as well as with other applicable accounting standards and disclosure requirements.
  6. Providing disclosures: Management must provide appropriate disclosures related to fair value measurements, including information about the valuation methods and assumptions used, the sensitivity of fair value measurements to changes in inputs, and the impact of fair value measurements on the financial statements.

Under ASC 820, the company management must exercise professional judgment and apply appropriate methods and assumptions to ensure that the measurements are reliable and consistent with accounting standards and disclosure requirements.

What is the effect of fair value measurements on a company’s financial statements?

The effect of fair value measurements on a company’s financial statements depends on the nature and significance of the assets and liabilities being measured. In general, fair value measurements can have a significant impact on a company’s financial statements, as they can result in changes in the reported values of assets, liabilities, and equity.

  1. Income Statement

For assets and liabilities measured at fair value on a recurring basis, changes in fair value are recorded in the company’s income statement as gains or losses. For example, if a company holds a portfolio of financial instruments that are measured at fair value on a recurring basis, changes in the fair value of those instruments would be recorded in the company’s income statement as gains or losses.

  • Balance Sheet

For assets and liabilities measured at fair value on a non-recurring basis, changes in fair value are generally recorded in the company’s balance sheet as adjustments to the carrying value of the asset or liability. For example, if a company holds a piece of real estate that is measured at fair value on a non-recurring basis, any changes in fair value would be recorded as an adjustment to the carrying value of the real estate on the balance sheet.

  • Portfolio of Financial Instruments

Fair value measurements can also impact the presentation of financial statement items. For example, if a company holds a portfolio of financial instruments that are measured at fair value, those instruments may be presented separately from other assets and liabilities on the balance sheet.

Fair value measurements can indeed have a significant impact on a company’s financial statements. Meaning that it’s important for companies to carefully consider the appropriate methods and assumptions used in determining fair value to ensure that their financial statements are accurate and reliable.

ASC 820 Fair Value Measurement With CPCON

Fair Value Measurement can get tricky when you need to appraise and evaluate a wide range of assets and liabilities. This puts more regulatory pressure on your business accounting practices. However, ASC 820 fair value measurement outline a clear path for measuring and determining Fair Value.

Our team of asset valuation experts has extensive experience in determining fair value for financial reporting, tax, insurance, and regulatory compliance. We can guide you through the valuation and accounting process. This can help you maximize value for your organization while remaining compliant with the latest regulations.

Contact us today to learn more.

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