Common U.S. GAAP Issues Facing Accountants, 2nd Edition

Chapter 6Fair Value Accounting

Learning objectives

• Identify key requirements of FASB ASC 820, Fair Value Measurement.
• Distinguish the difference between an orderly transaction and a forced transaction.
• Identify key characteristics of the fair value measurement hierarchy.

Overview

The guidance in FASB ASC 820 describes how to determine fair values when existing (or new) financial reporting requirements dictate that a fair value be determined for recognition or disclosure purposes, or both.

FASB ASC 820 defines fair value, establishes a framework for measuring fair value when required under GAAP, and provides required disclosures about fair value measurements. It applies to other FASB ASC topics that require or permit fair value measurements.

Fair value is a market-based measurement, not an entity-specific measurement. The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. Fair value measurements are also applied to instruments that are classified in shareholders’ equity when their measurement dictates that their fair value be determined.

For some assets and liabilities, observable market transactions and market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same — to estimate the price at which an orderly transaction to sell the asset or ...