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- Note that while an entity considers both transaction and transportation costs in determining the most advantageous market, transaction costs are not included in a fair value measurement under ASC 820 (as discussed in Section 10.2.5.3).
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Are transaction costs included in fair value measurements under ASC 820?
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Transaction costs—Transaction costs are not considered an attribute of the asset or liability and therefore should not be included in the measurement of fair value. While excluded from the determination of fair value, transaction costs should be considered in determining the most advantageous market.
- 4.8A Restricted Assets
Example 6, Case A: Restriction on the Sale of an Equity...
- 4.2 Definition of fair value
While transaction costs are not included in the fair value...
- 4.8A Restricted Assets
Sep 30, 2022 · While transaction costs are not included in the fair value of the asset or liability under ASC 820, these amounts are included when assessing the net transaction proceeds to determine the most advantageous market, as illustrated in Example FV 4-2.
- Measurement exception to the fair value principles for financial instruments (updated September 2023)
- Illustrations Example 6: Restricted Assets Case A: Restriction on the Sale of an Equity Instrument 820-10-55-52
- Case B: Restriction on the Use of an Asset 820-10-55-54
- Example 6: Restricted Assets 820-10-55-51
- The transaction
- May a company have different principal (or most advantageous) markets for the same asset or liability?
- In situations where a company has access to multiple markets, should the principal market be determined based on entity-specific volume and activity or market-based volume and activity?
- Is it possible for orderly transactions to take place in a “distressed” market?
- Characteristics of market participants
- Highest and best use versus current use
- Illustration 8.1-1: Illustrative example of highest and best use
- Valuation premise — in combination with other assets and/or liabilities
- Valuation Premise for Nonfinancial Assets 820-10-55-3
- Valuation premise — standalone basis
- Effect of an entity’s own credit risk on the fair value of a liability
- Fair value of instruments classified in a reporting entity’s shareholders’ equity
- Equity instruments not held by another party as an asset
- How does the valuation of a liability based on a transfer notion differ from that based on a settlement notion?
- How should a company incorporate its own credit risk into the valuation of its derivative contracts?
- Does the existence of master netting agreements or CSAs eliminate the need to consider an entity’s own credit risk when measuring the fair value of derivative liabilities?
- Should a company incorporate nonperformance risk into the valuation of a warrant on its own stock that may be settled in cash and is classified as a liability?
- Question 9.2-5
- Other application issues
- Valuation techniques (updated September 2022)
- Weighting different indications of value
- How is associated debt treated when estimating the fair value of an equity interest?
As part of converging its fair value guidance with IFRS, the FASB clarified that the concepts of “highest and best use” and “valuation premise” apply only to the measurement of nonfinancial assets. This clarification could have significantly changed the valuation of over-the-counter (OTC) derivatives, which are generally measured on a portfolio bas...
reporting entity holds an equity instrument (a financial asset) for which sale is legally or contractually restricted for a specified period. (For example, such a restriction could limit sale to qualifying investors, as may be the case in accordance with Rule 144 or similar rules of the Securities and Exchange Commission [SEC].) The restriction is ...
donor contributes land in an otherwise developed residential area to a not-for-profit neighborhood association. The land is currently used as a playground. The donor specifies that the land must continue to be used by the association as a playground in perpetuity; however, the association is not restricted from selling the land. Upon review of rele...
The effect on a fair value measurement arising from a restriction on the sale or use of an asset by a reporting entity will differ depending on whether the restriction would be taken into account by market participants when pricing the asset. When the restriction is included within the unit of account of the asset, the restriction is a characterist...
In determining fair value, the transaction to sell an asset or transfer a liability as of the measurement date is, by definition, hypothetical because the transaction has not yet occurred. If the asset had been sold or the liability transferred as of the measurement date, there would be no asset or liability for the reporting entity to measure at f...
In certain instances, it may be appropriate for a company to determine that it has different principal markets for the same asset or liability. For example, there may be different exit markets for separate businesses of a single company for the same asset because those businesses are engaged in different activities and, therefore, have access to di...
AT In most instances, the market in which a reporting entity would sell an asset (or transfer a liability) with the greatest frequency will also represent the market with the greatest volume and deepest liquidity for all market participants. In these instances, the principal market would be the same regardless of whether it is determined based on e...
While there may be increased instances of transactions that are not orderly when a market has undergone a significant decrease in volume, it is not appropriate to assume that all transactions that occur in a market during a period of dislocation are distressed or forced. This determination is made at the individual transaction level and requires th...
ASC 820 defines market participants as buyers and sellers in the principal (or most advantageous) market for an asset or liability that have all of the following characteristics: They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measur...
Companies should consider alternative uses of an asset in their determination of fair value. A company’s current or intended use of a nonfinancial asset might not be the highest and best use of the asset, and thus does not determine its premise of value. Instead, the highest and best use of the asset (or asset group) should be determined based on h...
A company acquires land in a business combination that is currently developed for industrial use as a site for a factory. This use of the land is presumed to be its highest and best use unless market or other factors suggest a different use. In this instance, nearby sites have recently been developed for residential use as sites for high-rise apart...
Market participants may maximize the value of an asset (or group of assets) by using the asset in combination with other assets or with other assets and liabilities. When considering this valuation premise, ASC 820 clarifies that the fair value of the asset would be measured from the perspective of market participants who are presumed to hold the c...
When measuring the fair value of a nonfinancial asset used in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (for example, a business), the effect of the valuation premise depends on the circumstances. For example: The fair value of the asset might be the s...
If a nonfinancial asset provides maximum value to market participants on a standalone basis, its fair value is determined individually. In addition, the asset should be measured based only on its current characteristics, potentially requiring an adjustment for transformation costs. For example, if land that is used as a factory site is to be valued...
NS Consistent with the idea that credit risk affects the initial measurement of a liability, the FASB believes that including changes in an entity’s own credit standing in subsequent fair value measurements is also appropriate. Because the terms of the obligation were determined based on the entity’s credit standing at the time of issuance (and sin...
The guidance for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity is generally consistent with the requirement for measuring liabilities, except for the requirement to incorporate nonperformance risk, which does not apply directly to equity instruments. As a result, the requirements for measuring the...
An equity instrument without a corresponding asset should be valued from the perspective of another market participant that has issued a similar claim on equity.
One important difference between the two concepts is the consideration of entity-specific advantages or disadvantages. Under a transfer notion, the fair value of a liability is based on the price that would be paid to market participants to assume the obligation. The guidance is clear that a company’s intention to settle or otherwise fulfill the li...
ASC 820 requires that the fair value measurement of a liability reflect nonperformance risk, which would include a company’s own credit risk. As such, when valuing its derivative liability positions, a company should incorporate the effect of its own credit standing. The valuation methodology used to measure the fair value of common types of deriva...
ASC 820 is clear that nonperformance risk should be considered from the perspective of the liability being measured, not the entity obligated under the liability. As such, nonperformance risk may differ for various liabilities of the same entity. This difference may result from the specific terms of the liability (e.g., seniority or priority in liq...
N Warrants, which function economically and structurally in a manner similar to stock options, are often issued as “equity kickers” to preferred stock or as yield enhancements to debt instruments. They are typically detachable and can be sold separately from the equity or debt instrument with which they were issued. The treatment of nonperformance ...
Note: The response to this question is specific to warrants issued and should not be analogized to other instruments issued by an entity related to its own equity, such as an agreement to repurchase shares at a specified price in the future.
A company may elect to use the portfolio approach on a portfolio-by-portfolio basis. In addition, if elected, companies are not required to apply the portfolio approach to all of the risks of the instruments that make up the particular group. For example, a company could choose to measure only the credit risk associated with a group of financial in...
ASC 820 recognizes three valuation approaches to measure fair value: the market approach, cost approach and income approach. These approaches are consistent with generally accepted valuation methodologies used outside of financial reporting. An entity shall use valuation techniques (e.g., matrix pricing, present value techniques) consistent with on...
0 Although the guidance refers to “weighting” results of different valuation techniques, we do not believe a company is required to explicitly apply percentage weights to each technique to determine fair value (although this may be appropriate in certain cases). The guidance does not prescribe a specific weighting methodology (e.g., explicit assign...
When estimating the fair value of an equity interest in an asset (e.g., an equity interest in an entity), valuation specialists commonly use an “indirect method” of the income approach or market approach. An indirect method (also referred to as a debt-free method) considers the cash flows available to all asset stakeholders. Typical indirect method...
The market that results in the highest value for the asset or the lowest amount that would be paid to transfer the liability (after transaction costs) will represent the most advantageous market.
However, ASC 820 does not specify when an entity is required or permitted to measure assets, liabilities, equity instruments, or transactions at fair value; this requirement is addressed in other US GAAP. An entity must consider the following issues in applying the fair value measurement framework in ASC 820:
Fair Value 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.” It establishes a framework for measuring fair value and expands disclosures. It also applies to other accounting
Note that while an entity considers both transaction and transportation costs in determining the most advantageous market, transaction costs are not included in a fair value measurement under ASC 820 (as discussed in Section 10.2.5.3).
