Fair Value Measurement (ASC 820) and ASU 2011-04

Another Joint Project has been put to bed with the issuance of ASU 2011-04Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  This ASU will not have much impact on US GAAP as its purpose is best described by its title. Most of the changes were to converge words. The ASU does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. 

It did however clarify some existing rules. Here are the highlights:

  • The concepts of “highest and best use” and “valuation premise” in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities.
  • When measuring the fair value of instruments classified in equity (e.g., equity issued in a business combination), the client should measure it from the perspective of a market participant that holds that instrument as an asset.
  • Quantitative information about the unobservable inputs used in Level 3 measurements should be included.
  • Additional disclosures:
    • For Level 3 measurements, the valuation processes used and the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs.
    • A reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use when that asset is measured at fair value in the statement of financial position or when its fair value is disclosed on the basis of its highest and best use.
    • The categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed (for example, a financial instrument that is measured at amortized cost in the statement of financial position but for which fair value is disclosed in accordance with Topic 825, Financial Instruments).

 Some of the disclosures are not required for nonpublic entities, including:

  • Transfers between Level 1 and Level 2
  • Sensitivity information related to Level 3 measurements
  • Categorization by level for items that are not on the balance sheet, but for which the fair value of such items is required to be disclosed

The amendments are effective for public entities for interim and annual periods beginning after December 15, 2011, and should be applied prospectively.  Early adoption is not permitted for public entities.  For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011, and should be applied prospectively.  Nonpublic entities may elect to apply the amendments early, but no earlier than interim periods beginning after December 15, 2011. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs resulting from the application of the amendments and quantify the total effect, if practicable.

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About John Hufnagle

John is an auditing, accounting and financial reporting specialist with over 40 years of public accounting experience. He was formerly a senior technical partner of a national accounting firm.
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