ASC 820 Fair Value Measurements and Disclosures applies to US GAAP which requires or permits fair value measurements or disclosures and provides a single framework for measuring fair value. The topic defines a fair value based on an “exit price” notion and uses a “fair value hierarchy,” which results in a market-based rather than an entity-specific measurement. ASC 820 establishes a single definition of fair value.

Fair Value is defined 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.”

Measurement of Fair Value (i.e., the determination of its Fair Value) is assumed to reflect a hypothetical transaction occurring in a Principal Market, “the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.”

Without a Principal Market, the asset or liability is assumed to be transferred in the “Most Advantageous Market.” In the context of these standards, this would be a marketplace that is “the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs in the respective market(s).”

In any case, the hypothetical transfer reflects the “Highest and Best Use,” implying that the Measurement (i.e., determination of Fair Value) shall assume that the asset or liability as sold is utilized to maximize its value.

 

Who needs to comply with ASC 820? 

 

• Hedge Funds                         

• Private Equity Funds

• Fund of funds 

• Business development companies

• Pension funds (public/private)

• Corporation

• Endowments

• Fund Administrators

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Who is required to measure the Fair Value of its assets and liabilities?

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Entities presenting their financial statements as compliant with US GAAP and GAAS must do so under law or regulations when addressing the fair value of their assets and liabilities. International Financial Accounting Standards (IFAS) have provisions similar to SFAS 157, and reporting under IFAS requires much the same treatment.

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MRV Consulting provides independent financial instrument valuation services comprising:

 

We perform financial instrument valuations for transaction advisory, litigation, and regulatory consulting, fund valuations for mergers and acquisitions, and tax planning compliance purposes.

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• Contractual Agreements

• Convertible Securities, Warrants, Options

• Debt (Senior, Subordinated, Secured, Unsecured, Non-performing, Mezzanine, Collateralized Debt Obligations)

• Derivatives (Interest Rate, Foreign Exchange)

• Equity (Common, Preferred)

• Real Estate (Investment Trusts)

• Securities (Distressed, Asset-Backed, Residential Mortgage, Commercial Mortgage, Auction Rate)

• Side Pocket Transactions

• Structured Investment Vehicles

• Structured Products (CDOs, CLOs, RMBS, CMBS, ABS)

• Swaps (Equity, Energy, Credit)

• Whole Loan Pools (Residential, Commercial, Asset-Backed)​

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