Fair Value Measurement (ASC 820)
ASC 820 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.
Explanation
Fair value is an exit price concept — what you would receive (for an asset) or pay (for a liability), not what you paid to acquire it. ASC 820 establishes a three-level hierarchy based on the quality of inputs used: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs based on entity assumptions).
The fair value hierarchy prioritizes Level 1 inputs and requires maximum use of observable inputs. Level 3 measurements require the most extensive disclosures. Fair value measurement is used across many standards — impairment testing, business combinations, financial instruments, and investment accounting.
Key Points
- •Exit price — what you'd receive or pay, not historical cost
- •Level 1: quoted prices in active markets for identical items
- •Level 2: observable inputs for similar items or quoted prices in inactive markets
- •Level 3: unobservable inputs requiring most judgment and disclosure
Exam Tip
Know the fair value hierarchy levels and be able to classify measurements. Level 3 questions often test what disclosures are required.
Frequently Asked Questions
Related Topics
Financial Instruments
Financial instruments include cash, equity investments, debt investments, derivatives, and other contracts that give rise to financial assets and financial liabilities.
Goodwill Impairment
Goodwill impairment occurs when the carrying amount of a reporting unit exceeds its fair value, requiring a write-down of goodwill to the extent of the excess, not below zero.
Business Combinations (ASC 805)
A business combination occurs when an acquirer obtains control of one or more businesses, accounted for using the acquisition method under ASC 805.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.