FASB ASC 820

Definition

FASB ASC 820, also known as the Fair Value Measurement standard, provides a framework for measuring fair value and requires disclosures about fair value measurements. It establishes a consistent definition of fair value, enhancing the comparability and transparency of financial reporting across entities. This standard is crucial for understanding the fair value hierarchy and measurement techniques used in various financial reporting contexts.

5 Must Know Facts For Your Next Test

1. FASB ASC 820 categorizes fair value measurements into a three-level hierarchy, with Level 1 being the most reliable and Level 3 being the least reliable due to reliance on unobservable inputs.
2. The fair value measurement framework applies to both financial and non-financial assets and liabilities, ensuring consistency across different types of reporting entities.
3. Disclosure requirements under FASB ASC 820 are designed to provide users with information about the valuation techniques and inputs used in measuring fair value.
4. Market participants' assumptions are critical in determining fair value, particularly for Level 2 and Level 3 inputs, which require judgment and estimation.
5. Regular updates and guidance from the FASB help clarify application issues related to FASB ASC 820, ensuring that entities maintain compliance with evolving standards.

Review Questions

• How does FASB ASC 820 define fair value, and what role does it play in financial reporting?
  • FASB 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 definition is crucial in financial reporting as it establishes a consistent approach for measuring fair value across different entities, thereby enhancing transparency and comparability. By providing a clear framework, FASB ASC 820 ensures that users of financial statements can better understand the values presented within them.
• Discuss the importance of the three-level hierarchy established by FASB ASC 820 in assessing fair value measurements.
  • The three-level hierarchy established by FASB ASC 820 is vital for assessing fair value measurements as it categorizes inputs based on their reliability. Level 1 inputs are quoted prices in active markets, providing the highest level of assurance. Level 2 inputs are based on observable data but not from active markets, while Level 3 inputs are unobservable and require significant judgment. This hierarchy helps financial statement users gauge the quality of the measurements reported and allows for a better understanding of potential risks involved.
• Evaluate how FASB ASC 820 affects the financial reporting practices of companies when valuing their assets and liabilities.
  • FASB ASC 820 significantly influences how companies approach financial reporting regarding asset and liability valuations. It compels organizations to adopt a structured framework for measuring fair value, ensuring that they consider market participant assumptions and apply consistent valuation techniques. This not only enhances the reliability of reported values but also mandates detailed disclosures about measurement processes and input assumptions. By doing so, it raises accountability among companies, ultimately benefiting investors and stakeholders who rely on accurate financial information.

Related terms

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.

Level 1 Inputs: Quoted prices in active markets for identical assets or liabilities that an entity can access at the measurement date.

Level 3 Inputs: Unobservable inputs for the asset or liability, reflecting the entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability.