Topic ASC 820 (previously FAS 157) was issued by the Financial Accounting Standards Board (FASB) and has been effective since November 2007. Topic 820 provides a single definition and framework for fair value measurements to ensure consistency of application.
Topic ASC 820:
- Defines fair value as the price an entity would receive when an asset is sold or the price an entity would pay when a liability is transferred.
- Establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures.
- Establishes a three-level hierarchy for fair value measurements based upon transparency of inputs to the valuation of an asset or liability as of the measurement date:
- Level 1: These represent quoted prices in active markets for identical assets that a market participant can access at the measurement date. Exchange-listed equity securities or exchange-traded mutual fund shares are the best example of a Level 1 input.
- Level 2: These are inputs that are observable either directly or indirectly. Examples here would include matrix pricing used to value fixed-income securities or prices obtained for unregistered funds that do not trade in a public market.
- Level 3: These are inputs that are observable either directly or indirectly. Examples here would include matrix pricing used to value fixed-income securities or prices obtained for unregistered funds that do not trade in a public market.
- Expands disclosures about fair value measurement. Such disclosures include:
- a description of valuation methodologies utilized for the assets in Levels 2 and 3 (e.g., pricing sources, internal models, appraisals);
- the level within the hierarchy in which each asset type falls as well as transfers between Levels 1 and Level 2; and
- for those fair value measurements using Level 3 inputs, a reconciliation of the beginning and ending balances for the asset including changes within the period due to transfers, purchases and sales, and gross gain/loss activity.
We hope that this information will assist you, but it should not be used or relied upon as a substitute for your own independent research. For a more comprehensive view of the standards/requirements, please visit the respective issuer's website.