ASC 820
Active
Fair Value Measurement
Defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.
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Conceptual Framework Linkage
Fair value as an exit price – the converged foundation
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. This is an EXIT PRICE concept, not an entry price – it focuses on what the market would pay, not what the entity originally paid. This definition is fully converged with IFRS 13 and represents one of the most significant and durable convergence achievements between US GAAP and IFRS.
A principles-based measurement standard
ASC 820 is a principles-based measurement standard that applies whenever another US GAAP standard requires or permits fair value measurement. It does not prescribe when fair value must be used – that decision lives in the relevant subject-matter standard (e.g. ASC 815 for derivatives, ASC 350 for goodwill). Instead, ASC 820 answers the question: once fair value is required, how do you determine it?
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Scope & Applicability
Applies whenever fair value is required or permitted
ASC 820 applies to all fair value measurements required or permitted by other US GAAP standards. It covers assets, liabilities, and equity instruments – both those recognised in the financial statements and those disclosed in the notes. The scope is intentionally broad: any time an entity uses fair value, ASC 820's definition, hierarchy, and disclosure requirements apply, whether the measurement is for initial recognition, subsequent measurement, or impairment testing.
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The Fair Value Definition
An orderly transaction between market participants at the measurement date
The ASC 820 fair value definition has FOUR key components: (1) an ORDERLY TRANSACTION – not a forced or distressed sale; (2) between MARKET PARTICIPANTS – not the entity itself; (3) at the MEASUREMENT DATE – fair value reflects conditions at that specific date; and (4) the transaction is the SALE of an asset or TRANSFER of a liability. This four-part definition is identical in substance to IFRS 13's definition and is the foundation for all subsequent measurement guidance.
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The Fair Value Hierarchy – Level 1, 2, and 3 Inputs
Prioritising observable market data
The fair value hierarchy prioritises inputs used in valuation techniques into three levels: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – observable inputs other than Level 1 prices, including quoted prices for similar assets, observable market data, and model-derived inputs; Level 3 – unobservable inputs reflecting the entity's own assumptions about what market participants would use. The hierarchy does not determine the measurement itself – it governs DISCLOSURE, requiring entities to disclose the extent to which fair value measurements rely on each level.
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Valuation Techniques and Inputs
Market, income, and cost approaches
Three broad valuation techniques are used under ASC 820: the market approach – using prices and other relevant information from market transactions involving identical or comparable assets or liabilities; the income approach – converting future cash flows to a single discounted present value; and the cost approach – reflecting the amount currently required to replace the service capacity of an asset. Entities must use valuation techniques appropriate for the circumstances and for which sufficient data are available, and must maximise the use of relevant observable inputs and minimise unobservable inputs.
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Market Participant Assumptions
Assume market participants have the same characteristics and act in their economic best interest
Fair value is determined from the perspective of a market participant, not the reporting entity itself. Market participants are assumed to: (a) act in their economic best interest; (b) have the same characteristics as a typical market participant for the asset or liability; and (c) be willing and able to enter into a transaction for the asset or liability. This means an entity cannot use its own unique operating plans or synergies when measuring fair value – it must assume the market participant faces the same risks and opportunities as any other buyer.
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Principal Market and Most Advantageous Market
The most relevant market for measuring fair value
The principal market is the market with the greatest volume and level of activity for the asset or liability. If no principal market exists, the entity uses the most advantageous market – the market that maximises the price that would be received to sell the asset or minimises the price that would be paid to transfer the liability, after transaction costs. ASC 820 does not require the entity to be able to sell the asset in that market on the measurement date – only that the market exists and would be the most advantageous.
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Liabilities and Own Equity Instruments
The same fair value definition applies to liabilities
When a quoted price for the transfer of an identical liability is not available, ASC 820 requires valuing the liability from the perspective of a market participant who holds the identical item as an asset. This 'corridor' approach uses observable market data for the asset to inform the liability measurement. For own equity instruments, fair value is measured using the same framework – the key question is whether the instrument is treated as an asset or liability from the market participant's perspective.
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Worked Example – Fair Value Hierarchy Classification
Classifying inputs in the fair value hierarchy
Example: Fair value measurement of a privately traded debt security
An entity holds a $10 million corporate bond that is NOT quoted in an active market. The valuation uses: (1) the bond's credit spread over the risk-free rate, derived from recent trades of similar issuers (Level 2); (2) the entity's own credit-adjusted discount rate, reflecting its own view of the bond's liquidity risk (Level 3); and (3) a quoted Treasury yield for the same maturity (Level 1).
The Treasury yield is Level 1 (quoted in an active market). The credit spread from similar issuers is Level 2 (observable market data, though not for the identical bond). The entity's own credit-adjusted rate is Level 3 (unobservable, entity-specific assumption). The final fair value is a weighted combination: Level 1 inputs are prioritised, Level 2 inputs supplement where observable markets exist, and Level 3 inputs are used only when observable inputs are not available. Disclosure must separately disclose the portion of fair value attributable to each level.
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Disclosure Requirements
What ASC 820 requires
Fair value measurement at the reporting date, by class of asset or liabilityLevel within the fair value hierarchy (Level 1, 2, or 3) for each classFor Level 3 measurements: reconciliation of beginning and ending balances, including total gains or losses, purchases, sales, and transfersValuation techniques and inputs used, including changes in technique and the reasons for those changesFor non-financial assets measured at fair value: highest and best use and the valuation technique(s) used
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Determining whether an active market exists for an asset or liabilitySelecting the appropriate valuation technique(s) for a given asset or liabilityDetermining the principal market or most advantageous market
SIGNIFICANT ESTIMATES
Level 3 unobservable inputs, including discount rates, growth assumptions, and correlation assumptionsCredit spread adjustments for debt securities where observable spreads are not availableFair value of derivatives or complex financial instruments without quoted market prices
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ASC 820 vs IFRS 13 – Comprehensive Comparison
Comparison – ASC 820 vs IFRS 13
FeatureUS GAAP (ASC 820)IFRS (IFRS 13)
Fair value definitionExit price in an orderly transaction between market participantsIdentical definition – fully converged
Fair value hierarchyLevel 1, 2, and 3 inputs, same prioritisationIdentical hierarchy – fully converged
Valuation techniquesMarket, income, and cost approaches permittedSame approaches permitted – fully converged
DisclosureExtensive disclosures for fair value measurementsIdentical disclosure requirements – fully converged
Liabilities – own credit riskChanges in own credit risk recognised in earningsIFRS 13 also requires own credit risk changes in earnings, but presentation may differ
ASC 820 and IFRS 13 are the most fully converged standards in the US GAAP/IFRS landscape. The few remaining differences relate to presentation of credit risk changes and specific disclosure formatting, not to substance.
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Statement Mapping
Where every ASC 820 event lands
EventStatement(s) affectedNotes
Fair value measurement – assetBSReported at fair value on balance sheet
Fair value measurement – liabilityBS ISChanges in fair value typically through earnings
Level 3 input changesBS IS OCIDepends on the underlying asset class
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Related Topics
Cross-reference map
TopicConnection
ASC 715Compensation–Retirement Benefits – fair value of plan assets
ASC 718Compensation–Stock Compensation – fair value of equity awards
ASC 805Business Combinations – fair value of acquired assets and liabilities
IFRS 13Fair Value Measurement – IFRS counterpart
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Quick-Reference Glossary
Fair value
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.
Exit price
The price that would be received to sell an asset or paid to transfer a liability – the perspective from which fair value is always measured.
Most advantageous market
The market that maximises the price that would be received to sell an asset (or minimises the price to transfer a liability) when no principal market exists.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows