📖 Overview
This standard defines a framework for measuring fair value and requires extensive disclosures about fair value measurements. Defines a 3-level fair value hierarchy based on valuation inputs.
🎯 Scope
This standard applies to the measurement and disclosure of Fair Value, when other standards require or permit fair value measurement or disclosure. It does not specify when fair value should be used, but how to measure it.
⚙️ Key Principles
1. **Definition of Fair Value**:
- The price that would be received to sell an asset (Exit Price) or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
2. **Fair Value Hierarchy**:
- **Level 1**: Quoted prices in active markets for identical assets or liabilities.
- **Level 2**: Inputs other than Level 1 prices that are directly or indirectly observable.
- **Level 3**: Unobservable inputs (management estimates).
3. **Market Participants**:
- Independent buyers and sellers, knowledgeable, and able to transact.
4. **Highest and Best Use**:
- For non-financial assets, measurement should consider the highest and best use of the asset from market participant perspective.
📏 Measurement
**Inputs by Level:**
**Level 1**:
- Quoted prices in active markets.
- Most reliable.
- No adjustments.
**Level 2**:
- Quoted prices for similar assets.
- Interest rates, yield curves.
- Implied volatility.
- Credit spreads.
- Directly or indirectly observable.
**Level 3**:
- Management estimates.
- Used when observable inputs are not available.
- Includes: Discounted cash flow model, option pricing model.
- Requires extensive disclosures.
**Valuation Techniques:**
- Market Approach.
- Cost Approach.
- Income Approach.
✅ Recognition
This standard does not specify when fair value measurement should be recognized; that is specified in other standards.
Fair value is measured at the measurement date (typically the balance sheet date).
The fair value hierarchy is applied consistently.
Transfers between levels are recognized on the date they occur.
📊 Presentation
**On the Balance Sheet:**
- Assets and liabilities measured at fair value are shown at fair values.
**Note Disclosures (extensive):**
- Fair value hierarchy for each class of assets and liabilities.
- Valuation techniques used.
- Significant inputs (especially for Level 3).
- Reconciliation of recurring Level 3 measurements.
- Sensitivity of Level 3 measurements to changes in unobservable inputs.
- Transfers between levels.
📝 Disclosure Requirements
Disclosures required for Recurring and Non-Recurring fair value measurements:
**For Level 1, 2, and 3:**
- Fair value hierarchy.
- Valuation techniques and inputs.
**For Level 3 only:**
- Reconciliation from beginning to end of period.
- Amount of total gains or losses recognized in income statement or OCI.
- Purchases, sales, issuances, and settlements.
- Sensitivity of measurements to changes in unobservable inputs.
**For Non-Recurring measurements:**
- Reasons for measurement.
- Gains or losses recognized.
**General:**
- Accounting policies for fair value measurement.
🔗 Related Standards
ASC 815 (Derivatives and Hedging), ASC 825 (Financial Instruments), ASC 820-10 (Overall Fair Value Measurement)