ASC 820-10 – FAIR VALUE MEASURMENT

WHAT IS ASC 820-10?
ASC 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. ASC 820-10 applies under other accounting pronouncements that require or permit fair value measurements. The statement is effective for fiscal years that begin after November 15, 2007.

WHAT IS IT NOT?
ASC 820-10 does not require any new fair value measurements. However, for some entities, the application of ASC 820-10 will change current practice.
 
WHY WAS THIS STATEMENT ISSUED?
Prior to ASC 820-10, there were different definitions of fair value and limited guidance for applying those definitions in GAAP. Also, guidance was dispersed among the many accounting pronouncements that require fair-value measurements. Differences in that guidance created inconsistencies that added to the complexity in applying GAAP.

WHAT IS FAIR VALUE?
Fair value is 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. ASC 820-10’s definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). ASC 820-10 establishes a fair value hierarchy that distinguishes between three levels:
Level 1: Quoted prices in active markets for identical assets, liabilities; no blockage factors 
(P x Q); 
Level 2: Other observable inputs; include quoted prices for similar assets, liabilities and market-corroborated inputs; 
Level 3: Unobservable inputs for the asset or liability; unobservable inputs shall be developed based on the best information available in the circumstances, which might include the reporting entity’s own data. Unobservable inputs can be used only when observable inputs are not available.
ASC 820-10 defines the following valuation techniques to measure fair value: Market Approach, Income Approach and Cost Approach.

ASC 820-10 DISCLOSURES
ASC 820-10 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods following initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using unobservable inputs (Level 3).

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