# ASC 820-10-55: Fair Value Measurement — Overall — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 820-10-55: 55 Implementation Guidance and Illustrations

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#### Implementation Guidance

##### [820-10-55-1](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-1)

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The objective of a [fair value](https://asc.understandingaccounting.org/glossary/f/#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.") measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires a reporting entity to determine all of the following:

1.  a
    
    The particular asset or liability that is the subject of the measurement (consistent with its [unit of account](https://asc.understandingaccounting.org/glossary/u/#unit-of-account "The level at which an asset or a liability is aggregated or disaggregated in a Topic for recognition purposes."))
    
2.  b
    
    For a nonfinancial asset, the valuation premise that is appropriate for the measurement (consistent with its [highest and best use](https://asc.understandingaccounting.org/glossary/h/#highest-and-best-use "The use of a nonfinancial asset by market participants that would maximize the value of the asset or the group of assets and liabilities (for example, a business) within which the asset would be used."))
    
3.  c
    
    The principal (or most advantageous) market for the asset or liability
    
4.  d
    
    The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop [inputs](https://asc.understandingaccounting.org/glossary/i/#inputs "The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following: The risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) The risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.") that represent the assumptions that [market participants](https://asc.understandingaccounting.org/glossary/m/#market-participants "Buyers and sellers in the principal (or most advantageous) market for the 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 measurement if the reporting entity has evidence that the transaction was entered into at market terms They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary They are able to enter into a transaction for the asset or liability They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.") would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.

##### [820-10-55-2](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-2)

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The judgments applied in different valuation situations may be different. This Section describes the judgments that might apply when a reporting entity measures fair value in different valuation situations.

##### [820-10-55-3](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3)

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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:

1.  a
    
    The fair value of the asset might be the same whether the asset is used on a standalone basis or in combination with other assets or with other assets and liabilities. That might be the case if the asset is a business that market participants would continue to operate. In that case, the transaction would involve valuing the business in its entirety. The use of the assets as a group in an ongoing business would generate synergies that would be available to market participants (that is, market participant synergies that, therefore, should affect the fair value of the asset on either a standalone basis or in combination with other assets or with other assets and liabilities).
    
2.  b
    
    An asset's use in combination with other assets or with other assets and liabilities might be incorporated into the fair value measurement through adjustments to the value of the asset used on a standalone basis. That might be the case if the asset is a machine and the fair value measurement is determined using an observed price for a similar machine (not installed or otherwise configured for use), adjusted for transportation and installation costs so that the fair value measurement reflects the current condition and location of the machine (installed and configured for use).
    
3.  c
    
    An asset's use in combination with other assets or with other assets and liabilities might be incorporated into the fair value measurement through the market participant assumptions used to measure the fair value of the asset. For example, if the asset is work-in-process inventory that is unique and market participants would convert the inventory into finished goods, the fair value of the inventory would assume that market participants have acquired or would acquire any specialized machinery necessary to convert the inventory into finished goods.
    
4.  d
    
    An asset's use in combination with other assets or with other assets and liabilities might be incorporated into the valuation technique used to measure the fair value of the asset. That might be the case when using the multiperiod excess earnings method to measure the fair value of an intangible asset because that valuation technique specifically takes into account the contribution of any complementary assets and the associated liabilities in the group in which such an intangible asset would be used.
    
5.  e
    
    In more limited situations, when a reporting entity uses an asset within a group of assets, the reporting entity might measure the asset at an amount that approximates its fair value when allocating the fair value of the asset group to the individual assets of the group. That might be the case if the valuation involves real property and the fair value of improved property (that is, an asset group) is allocated to its component assets (such as land and improvements).

##### [820-10-55-3A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3A)

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The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business.

##### [820-10-55-3B](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3B)

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For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might be in ranges with a different multiple for each comparable. The selection of the appropriate multiple within the range requires judgment, considering qualitative and quantitative factors specific to the measurement.

##### [820-10-55-3C](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3C)

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Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value some types of financial instruments, such as debt securities, without relying exclusively on quoted prices for the specific securities, but rather relying on the securities' relationship to other benchmark quoted securities.

##### [820-10-55-3D](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3D)

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The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

##### [820-10-55-3E](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3E)

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From the perspective of a market participant seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. That is because a market participant buyer would not pay more for an asset than the amount for which it could replace the service capacity of that asset. Obsolescence encompasses physical deterioration, functional (technological) obsolescence, and economic (external) obsolescence and is broader than depreciation for financial reporting purposes (an allocation of historical cost) or tax purposes (using specified service lives). In many cases, the current replacement cost method is used to measure the fair value of tangible assets that are used in combination with other assets or with other assets and liabilities.

##### [820-10-55-3F](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3F)

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The income approach converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts.

##### [820-10-55-3G](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-3G)

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Those valuation techniques include, for example, the following:

1.  a
    
    [Present value](https://asc.understandingaccounting.org/glossary/p/#present-value "A tool used to link future amounts (cash flows or values) to a present amount using a discount rate (an application of the income approach). Present value techniques differ in how they adjust for risk and in the type of cash flows they use. See Discount Rate Adjustment Technique.") techniques
    
2.  b
    
    Option-pricing models, such as the Black-Scholes-Merton formula or a binomial model (that is, a lattice model), that incorporate present value techniques and reflect both the time value and the intrinsic value of an option
    
3.  c
    
    The multiperiod excess earnings method, which is used to measure the fair value of some intangible assets.

##### [820-10-55-4](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-4)

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Paragraphs

[820-10-55-5 through 55-20](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-5)

describe the use of present value techniques to measure fair value. Those paragraphs focus on a [discount rate adjustment technique](https://asc.understandingaccounting.org/glossary/d/#discount-rate-adjustment-technique "A present value technique that uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows.") and an [expected cash flow](https://asc.understandingaccounting.org/glossary/e/#expected-cash-flow "The probability-weighted average (that is, mean of the distribution) of possible future cash flows.") (expected present value) technique. Those paragraphs neither prescribe the use of a single specific present value technique nor limit the use of present value techniques to measure fair value to the techniques discussed. The present value technique used to measure fair value will depend on facts and circumstances specific to the asset or liability being measured (for example, whether prices for comparable assets or liabilities can be observed in the market) and the availability of sufficient data.

##### [820-10-55-5](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-5)

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[Present value](https://asc.understandingaccounting.org/glossary/p/#present-value "A tool used to link future amounts (cash flows or values) to a present amount using a discount rate (an application of the income approach). Present value techniques differ in how they adjust for risk and in the type of cash flows they use. See Discount Rate Adjustment Technique.") (that is, an application of the [income approach](https://asc.understandingaccounting.org/glossary/i/#income-approach "Valuation approaches that convert future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.")) is a tool used to link future amounts (for example, cash flows or values) to a present amount using a discount rate. A fair value measurement of an asset or a liability using a present value technique captures all of the following elements from the perspective of market participants at the measurement date:

1.  a
    
    An estimate of future cash flows for the asset or liability being measured.
    
2.  b
    
    Expectations about possible variations in the amount and timing of the cash flows representing the uncertainty inherent in the cash flows.
    
3.  c
    
    The time value of money, represented by the rate on risk-free monetary assets that have maturity dates or durations that coincide with the period covered by the cash flows and pose neither uncertainty in timing nor risk of default to the holder (that is, a risk-free interest rate). For present value computations denominated in nominal U.S. dollars, the yield curve for U.S. Treasury securities determines the appropriate risk-free interest rate.
    
4.  d
    
    The price for bearing the uncertainty inherent in the cash flows (that is, a [risk premium](https://asc.understandingaccounting.org/glossary/r/#risk-premium "Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability. Also referred to as a risk adjustment.")).
    
5.  e
    
    Other factors that market participants would take into account in the circumstances.
    
6.  f
    
    For a liability, the [nonperformance risk](https://asc.understandingaccounting.org/glossary/n/#nonperformance-risk "The risk that an entity will not fulfill an obligation. Nonperformance risk includes, but may not be limited to, the reporting entity's own credit risk.") relating to that liability, including the reporting entity's (that is, the obligor's) own [credit risk](https://asc.understandingaccounting.org/glossary/c/#credit-risk "For purposes of a hedged item in a fair value hedge, credit risk is the risk of changes in the hedged item's fair value attributable to both of the following: Changes in the obligor's creditworthiness Changes in the spread over the benchmark interest ratewith respect to the hedged item's credit sector at inception of the hedge. For purposes of a hedged transaction in a cash flow hedge, credit risk is the risk of changes in the hedged transaction's cash flows attributable to all of the following: Default Changes in the obligor's creditworthiness Changes in the spread over the contractually specified interest rate or the benchmark interest rate with respect to the related financial asset's or liability's credit sector at inception of the hedge.").

##### [820-10-55-6](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-6)

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Present value techniques differ in how they capture the elements in the preceding paragraph. However, all of the following general principles govern the application of any present value technique used to measure fair value:

1.  a
    
    Cash flows and discount rates should reflect assumptions that market participants would use when pricing the asset or liability.
    
2.  b
    
    Cash flows and discount rates should take into account only the factors attributable to the asset or liability being measured.
    
3.  c
    
    To avoid double counting or omitting the effects of risk factors, discount rates should reflect assumptions that are consistent with those inherent in the cash flows. For example, a discount rate that reflects the uncertainty in expectations about future defaults is appropriate if using contractual cash flows of a loan (that is, a discount rate adjustment technique). That same rate should not be used if using expected (that is, probability-weighted) cash flows (that is, an expected present value technique) because the expected cash flows already reflect assumptions about the uncertainty in future defaults; instead, a discount rate that is commensurate with the risk inherent in the expected cash flows should be used.
    
4.  d
    
    Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows, which include the effect of inflation, should be discounted at a rate that includes the effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows, which exclude the effect of inflation, should be discounted at a rate that excludes the effect of inflation. Similarly, after-tax cash flows should be discounted using an after-tax discount rate. Pretax cash flows should be discounted at a rate consistent with those cash flows.
    
5.  e
    
    Discount rates should be consistent with the underlying economic factors of the currency in which the cash flows are denominated.

##### [820-10-55-7](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-7)

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A fair value measurement using present value techniques is made under conditions of uncertainty because the cash flows used are estimates rather than known amounts. In many cases, both the amount and timing of the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are uncertain if there is risk of default.

##### [820-10-55-8](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-8)

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Market participants generally seek compensation (that is, a risk premium) for bearing the uncertainty inherent in the cash flows of an asset or a liability. A fair value measurement should include a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases, determining the appropriate risk premium might be difficult. However, the degree of difficulty alone is not a sufficient reason to exclude a risk premium.

##### [820-10-55-9](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-9)

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Present value techniques differ in how they adjust for risk and in the type of cash flows they use. For example:

1.  a
    
    The discount rate adjustment technique (see paragraphs
    
    [820-10-55-10 through 55-12](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-10)
    
    ) uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows.
    
2.  b
    
    Method 1 of the expected present value technique (see paragraph [820-10-55-15](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-15)) uses risk-adjusted expected cash flows and a risk-free rate.
    
3.  c
    
    Method 2 of the expected present value technique (see paragraph [820-10-55-16](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-16)) uses expected cash flows that are not risk adjusted and a discount rate adjusted to include the risk premium that market participants require. That rate is different from the rate used in the discount rate adjustment technique.

##### [820-10-55-10](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-10)

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The discount rate adjustment technique uses a single set of cash flows from the range of possible estimated amounts, whether contractual or promised (as is the case for a bond) or most likely cash flows. In all cases, those cash flows are conditional upon the occurrence of specified events (for example, contractual or promised cash flows for a bond are conditional on the event of no default by the debtor). The discount rate used in the discount rate adjustment technique is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Accordingly, the contractual, promised, or most likely cash flows are discounted at an observed or estimated market rate for such conditional cash flows (that is, a market rate of return).

##### [820-10-55-11](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-11)

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The discount rate adjustment technique requires an analysis of market data for comparable assets or liabilities. Comparability is established by considering the nature of the cash flows (for example, whether the cash flows are contractual or noncontractual and are likely to respond similarly to changes in economic conditions), as well as other factors (for example, credit standing, collateral, duration, restrictive covenants, and liquidity). Alternatively, if a single comparable asset or liability does not fairly reflect the risk inherent in the cash flows of the asset or liability being measured, it may be possible to derive a discount rate using data for several comparable assets or liabilities in conjunction with the risk-free yield curve (that is, using a build-up methodology). Paragraph [820-10-55-33](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-33) illustrates the build-up methodology.

##### [820-10-55-12](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-12)

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When the discount rate adjustment technique is applied to fixed receipts or payments, the adjustment for risk inherent in the cash flows of the asset or liability being measured is included in the discount rate. In some applications of the discount rate adjustment technique to cash flows that are not fixed receipts or payments, an adjustment to the cash flows may be necessary to achieve comparability with the observed asset or liability from which the discount rate is derived.

##### [820-10-55-13](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-13)

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The expected present value technique uses as a starting point a set of cash flows that represents the probability-weighted average of all possible future cash flows (that is, the expected cash flows). The resulting estimate is identical to expected value, which, in statistical terms, is the weighted average of a discrete random variable's possible values with the respective probabilities as the weights. Because all possible cash flows are probability-weighted, the resulting expected cash flow is not conditional upon the occurrence of any specified event (unlike the cash flows used in the discount rate adjustment technique).

##### [820-10-55-14](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-14)

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In making an investment decision, risk-averse market participants would take into account the risk that the actual cash flows may differ from the expected cash flows. Portfolio theory distinguishes between two types of risk:

1.  a
    
    [Unsystematic (diversifiable) risk](https://asc.understandingaccounting.org/glossary/u/#unsystematic-risk "The risk specific to a particular asset or liability. Also referred to as diversifiable risk.")
    
2.  b
    
    [Systematic (nondiversifiable) risk](https://asc.understandingaccounting.org/glossary/s/#systematic-risk "The common risk shared by an asset or a liability with the other items in a diversified portfolio. Portfolio theory holds that in a market in equilibrium, market participants will be compensated only for bearing the systematic risk inherent in the cash flows. (In markets that are inefficient or out of equilibrium, other forms of return or compensation might be available.) Also referred to as nondiversifiable risk.").

##### [820-10-55-15](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-15)

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Method 1 of the expected present value technique adjusts the expected cash flows of an asset for systematic (that is, market) risk by subtracting a cash risk premium (that is, risk-adjusted expected cash flows). Those risk-adjusted expected cash flows represent a certainty equivalent cash flow, which is discounted at a risk-free interest rate. A certainty equivalent cash flow refers to an expected cash flow (as defined), adjusted for risk so that a market participant is indifferent to trading a certain cash flow for an expected cash flow. For example, if a market participant was willing to trade an expected cash flow of $1,200 for a certain cash flow of $1,000, the $1,000 is the certainty equivalent of the $1,200 (that is, the $200 would represent the cash risk premium). In that case, the market participant would be indifferent as to the asset held.

##### [820-10-55-16](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-16)

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In contrast, Method 2 of the expected present value technique adjusts for systematic (that is, market) risk by applying a risk premium to the risk-free interest rate. Accordingly, the expected cash flows are discounted at a rate that corresponds to an expected rate associated with probability-weighted cash flows (that is, an expected rate of return). Models used for pricing risky assets, such as the capital asset pricing model, can be used to estimate the expected rate of return. Because the discount rate used in the discount rate adjustment technique is a rate of return relating to conditional cash flows, it is likely to be higher than the discount rate used in Method 2 of the expected present value technique, which is an expected rate of return relating to expected or probability-weighted cash flows.

##### [820-10-55-17](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-17)

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To illustrate Methods 1 and 2, assume that an asset has expected cash flows of $780 in 1 year determined on the basis of the possible cash flows and probabilities shown below. The applicable risk-free interest rate for cash flows with a 1-year horizon is 5 percent, and the systematic risk premium for an asset with the same risk profile is 3 percent.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-1ED75931-EB89-4166-9FC9-A7EE22340998-low.gif)
    
    Possible Cash Flows Probability Probability-Weighted Cash Flows $500 15% $75 $800 60% $480 $900 25% $225 Expected cash flows $780

##### [820-10-55-18](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-18)

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In this simple illustration, the expected cash flows ($780) represent the probability-weighted average of the 3 possible outcomes. In more realistic situations, there could be many possible outcomes. However, to apply the expected present value technique, it is not always necessary to take into account distributions of all possible cash flows using complex models and techniques. Rather, it might be possible to develop a limited number of discrete scenarios and probabilities that capture the array of possible cash flows. For example, a reporting entity might use realized cash flows for some relevant past period, adjusted for changes in circumstances occurring subsequently (for example, changes in external factors, including economic or market conditions, industry trends, and competition as well as changes in internal factors affecting the reporting entity more specifically), taking into account the assumptions of market participants.

##### [820-10-55-19](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-19)

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In theory, the present value (that is, the fair value) of the asset's cash flows is the same whether determined using Method 1 or Method 2, as follows:

1.  a
    
    Using Method 1, the expected cash flows are adjusted for systematic (that is, market) risk. In the absence of market data directly indicating the amount of the risk adjustment, such adjustment could be derived from an asset pricing model using the concept of certainty equivalents. For example, the risk adjustment (that is, the cash risk premium of $22) could be determined using the systematic risk premium of 3 percent ($780 - \[$780 × (1.05/1.08)\]), which results in risk-adjusted expected cash flows of $758 ($780 - $22). The $758 is the certainty equivalent of $780 and is discounted at the risk-free interest rate (5 percent). The present value (that is, the fair value) of the asset is $722 ($758/1.05).
    
2.  b
    
    Using Method 2, the expected cash flows are not adjusted for systematic (that is, market) risk. Rather, the adjustment for that risk is included in the discount rate. Thus, the expected cash flows are discounted at an expected rate of return of 8 percent (that is, the 5 percent risk-free interest rate plus the 3 percent systematic risk premium). The present value (that is, the fair value) of the asset is $722 ($780/1.08).

##### [820-10-55-20](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-20)

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When using an expected present value technique to measure fair value, either Method 1 or Method 2 could be used. The selection of Method 1 or Method 2 will depend on facts and circumstances specific to the asset or liability being measured, the extent to which sufficient data are available, and the judgments applied.

##### [820-10-55-21](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-21)

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Examples of [Level 2 inputs](https://asc.understandingaccounting.org/glossary/l/#level-2-inputs "Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.") for particular assets and liabilities include the following:

1.  a
    
    Receive-fixed, pay-variable interest rate swap based on the London Interbank Offered Rate (LIBOR) swap rate. A Level 2 input would be the LIBOR swap rate if that rate is observable at commonly quoted intervals for substantially the full term of the swap.
    
2.  b
    
    Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a foreign currency. A Level 2 input would be the swap rate based on a yield curve denominated in a foreign currency that is observable at commonly quoted intervals for substantially the full term of the swap. That would be the case if the term of the swap is 10 years and that rate is observable at commonly quoted intervals for 9 years, provided that any reasonable extrapolation of the yield curve for Year 10 would not be significant to the fair value measurement of the swap in its entirety.
    
3.  c
    
    Receive-fixed, pay-variable interest rate swap based on a specific bank's prime rate. A Level 2 input would be the bank's prime rate derived through extrapolation if the extrapolated values are corroborated by observable market data, for example, by correlation with an interest rate that is observable over substantially the full term of the swap.
    
4.  d
    
    Three-year option on exchange-traded shares. A Level 2 input would be the implied volatility for the shares derived through extrapolation to Year 3 if both of the following conditions exist:
    
    1.  1
        
        Prices for one-year and two-year options on the shares are observable.
        
    2.  2
        
        The extrapolated implied volatility of a three-year option is corroborated by observable market data for substantially the full term of the option.
        
    
    In that case, the implied volatility could be derived by extrapolating from the implied volatility of the one-year and two-year options on the shares and corroborated by the implied volatility for three-year options on comparable entities' shares, provided that correlation with the one-year and two-year implied volatilities is established.
    
5.  e
    
    Licensing arrangement. For a licensing arrangement that is acquired in a [business combination](https://asc.understandingaccounting.org/glossary/b/#business-combination "A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. See also Acquisition by a Not-for-Profit Entity.") and was recently negotiated with an unrelated party by the acquired entity (the party to the licensing arrangement), a Level 2 input would be the royalty rate in the contract with the unrelated party at inception of the arrangement.
    
6.  f
    
    Finished goods inventory at a retail outlet. For finished goods inventory that is acquired in a business combination, a Level 2 input would be either a price to customers in a retail market or a price to retailers in a wholesale market, adjusted for differences between the condition and location of the inventory item and the comparable (that is, similar) inventory items so that the fair value measurement reflects the price that would be received in a transaction to sell the inventory to another retailer that would complete the requisite selling efforts. Conceptually, the fair value measurement will be the same, whether adjustments are made to a retail price (downward) or to a wholesale price (upward). Generally, the price that requires the least amount of subjective adjustments should be used for the fair value measurement.
    
7.  g
    
    Building held and used. A Level 2 input would be the price per square foot for the building (a valuation multiple) derived from observable market data, for example, multiples derived from prices in observed transactions involving comparable (that is, similar) buildings in similar locations.
    
8.  h
    
    Reporting unit. A Level 2 input would be a valuation multiple (for example, a multiple of earnings or revenue or a similar performance measure) derived from observable market data, for example, multiples derived from prices in observed transactions involving comparable (that is, similar) businesses, taking into account operational, market, financial, and nonfinancial factors.

##### [820-10-55-22](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-22)

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Examples of [Level 3 inputs](https://asc.understandingaccounting.org/glossary/l/#level-3-inputs "Unobservable inputs for the asset or liability.") for particular assets and liabilities include the following:

1.  a
    
    Long-dated currency swap. A Level 3 input would be an interest rate in a specified currency that is not observable and cannot be corroborated by observable market data at commonly quoted intervals or otherwise for substantially the full term of the currency swap. The interest rates in a currency swap are the swap rates calculated from the respective countries' yield curves.
    
2.  b
    
    Three-year option on exchange-traded shares. A Level 3 input would be historical volatility, that is, the volatility for the shares derived from the shares' historical prices. Historical volatility typically does not represent current market participants' expectations about future volatility, even if it is the only information available to price an option.
    
3.  c
    
    Interest rate swap. A Level 3 input would be an adjustment to a mid-market consensus (nonbinding) price for the swap developed using data that are not directly observable and cannot otherwise be corroborated by observable market data.
    
4.  d
    
    Asset retirement obligation at initial recognition. A Level 3 input would be a current estimate using the reporting entity's own data about the future cash outflows to be paid to fulfill the obligation (including market participants' expectations about the costs of fulfilling the obligation and the compensation that a market participant would require for taking on the asset retirement obligation) if there is no reasonably available information that indicates that market participants would use different assumptions. That Level 3 input would be used in a present value technique together with other inputs, for example, a current risk-free interest rate or a credit-adjusted risk-free rate if the effect of the reporting entity's credit standing on the fair value of the liability is reflected in the discount rate rather than in the estimate of future cash outflows.
    
5.  e
    
    Reporting unit. A Level 3 input would be a financial forecast (for example, of cash flows or earnings) developed using the reporting entity's own data if there is no reasonably available information that indicates that market participants would use different assumptions.

##### [820-10-55-22A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-22A)

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[Paragraphs 820-10-55-22A through 55-23 superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-22A).

##### [820-10-55-23A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-23A)

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[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-23B](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-23B)

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[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-23C](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-23C)

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[Paragraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-23D](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-23D)

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[Paragraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

#### Illustrations

##### [820-10-55-24](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-24)

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The following Examples portray hypothetical situations illustrating the judgments that might apply when a reporting entity measures assets and liabilities at fair value in different valuation situations. Although some aspects of the examples may be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying this Topic.

##### [820-10-55-25](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-25)

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Cases A through C illustrate the application of the highest-and-best-use and valuation premise concepts for nonfinancial assets.

1.  a
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
2.  b
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
3.  c
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-26](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-26)

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A reporting entity acquires assets and assumes liabilities in a business combination. One of the groups of assets acquired comprises Assets A, B, and C. Asset C is billing software integral to the business developed by the acquired entity for its own use in conjunction with Assets A and B (that is, the related assets). The reporting entity measures the fair value of each of the assets individually, consistent with the specified unit of account for the assets. The reporting entity determines that the highest and best use of the assets is their current use and that each asset would provide maximum value to market participants principally through its use in combination with other assets or with other assets and liabilities (that is, its complementary assets and the associated liabilities). There is no evidence to suggest that the current use of the assets is not their highest and best use.

##### [820-10-55-27](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-27)

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In this situation, the reporting entity would sell the assets in the market in which it initially acquired the assets (that is, the entry and exit markets from the perspective of the reporting entity are the same). Market participant buyers with whom the reporting entity would enter into a transaction in that market have characteristics that are generally representative of both strategic buyers (such as competitors) and financial buyers (such as private equity or venture capital firms that do not have complementary investments) and include those buyers that initially bid for the assets. Although market participant buyers might be broadly classified as strategic or financial buyers, in many cases there will be differences among the market participant buyers within each of those groups, reflecting, for example, different uses for an asset and different operating strategies.

##### [820-10-55-28](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-28)

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As discussed below, differences between the indicated fair values of the individual assets relate principally to the use of the assets by those market participants within different asset groups:

1.  a
    
    Strategic buyer asset group. The reporting entity determines that strategic buyers have related assets that would enhance the value of the group within which the assets would be used (that is, market participant synergies). Those assets include a substitute asset for Asset C (the billing software), which would be used for only a limited transition period and could not be sold on its own at the end of that period. Because strategic buyers have substitute assets, Asset C would not be used for its full remaining economic life. The indicated fair values of Assets A, B, and C within the strategic buyer asset group (reflecting the synergies resulting from the use of the assets within that group) are $360, $260, and $30, respectively. The indicated fair value of the assets as a group within the strategic buyer asset group is $650.
    
2.  b
    
    Financial buyer asset group. The reporting entity determines that financial buyers do not have related or substitute assets that would enhance the value of the group within which the assets would be used. Because financial buyers do not have substitute assets, Asset C (that is, the billing software) would be used for its full remaining economic life. The indicated fair values of Assets A, B, and C within the financial buyer asset group are $300, $200, and $100, respectively. The indicated fair value of the assets as a group within the financial buyer asset group is $600.

##### [820-10-55-29](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-29)

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The fair values of Assets A, B, and C would be determined on the basis of the use of the assets as a group within the strategic buyer group ($360, $260, and $30). Although the use of the assets within the strategic buyer group does not maximize the fair value of each of the assets individually, it maximizes the fair value of the assets as a group ($650).

##### [820-10-55-30](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-30)

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A reporting entity acquires land in a business combination. The land is currently developed for industrial use as a site for a factory. The current use of land is presumed to be its highest and best use unless market or other factors suggest a different use. Nearby sites have recently been developed for residential use as sites for high-rise apartment buildings. On the basis of that development and recent zoning and other changes to facilitate that development, the reporting entity determines that the land currently used as a site for a factory could be developed as a site for residential use (that is, for high-rise apartment buildings) because market participants would take into account the potential to develop the site for residential use when pricing the land.

##### [820-10-55-31](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-31)

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The highest and best use of the land would be determined by comparing both of the following:

1.  a
    
    The value of the land as currently developed for industrial use (that is, the land would be used in combination with other assets, such as the factory, or with other assets and liabilities)
    
2.  b
    
    The value of the land as a vacant site for residential use, taking into account the costs of demolishing the factory and other costs (including the uncertainty about whether the reporting entity would be able to convert the asset to the alternative use) necessary to convert the land to a vacant site (that is, the land is to be used by market participants on a standalone basis).
    

The highest and best use of the land would be determined on the basis of the higher of those values. In situations involving real estate appraisal, the determination of highest and best use might take into account factors relating to the factory operations, including its assets and liabilities.

##### [820-10-55-32](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-32)

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A reporting entity acquires an in-process research and development project in a business combination. The reporting entity does not intend to complete the project. If completed, the project would compete with one of its own projects (to provide the next generation of the reporting entity's commercialized technology). Instead, the reporting entity intends to hold (that is, lock up) the project to prevent its competitors from obtaining access to the technology. In doing this, the project is expected to provide defensive value, principally by improving the prospects for the reporting entity's own competing technology. To measure the fair value of the project at initial recognition, the highest and best use of the project would be determined on the basis of its use by market participants. For example:

1.  a
    
    The highest and best use of the in-process research and development project would be to continue development if market participants would continue to develop the project and that use would maximize the value of the group of assets or of assets and liabilities in which the project would be used (that is, the asset would be used in combination with other assets or with other assets and liabilities). That might be the case if market participants do not have similar technology, either in development or commercialized. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project, assuming that the in-process research and development would be used with its complementary assets and the associated liabilities and that those assets and liabilities would be available to market participants.
    
2.  b
    
    The highest and best use of the in-process research and development project would be to cease development if, for competitive reasons, market participants would lock up the project and that use would maximize the value of the group of assets or of assets and liabilities in which the project would be used. That might be the case if market participants have technology in a more advanced stage of development that would compete with the project if completed and the project would be expected to improve the prospects for their own competing technology if locked up. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project, assuming that the in-process research and development would be used (that is, locked up) with its complementary assets and the associated liabilities and that those assets and liabilities would be available to market participants.
    
3.  c
    
    The highest and best use of the in-process research and development project would be to cease development if market participants would discontinue its development. That might be the case if the project is not expected to provide a market rate of return if completed and would not otherwise provide defensive value if locked up. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project on its own (which might be zero).

##### [820-10-55-33](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-33)

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To illustrate a build-up methodology (as discussed in paragraph [820-10-55-11](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-11)), assume that Asset A is a contractual right to receive $800 in 1 year (that is, there is no timing uncertainty). There is an established market for comparable assets, and information about those assets, including price information, is available. Of those comparable assets:

1.  a
    
    Asset B is a contractual right to receive $1,200 in 1 year and has a market price of $1,083. Thus, the implied annual rate of return (that is, a 1-year market rate of return) is 10.8 percent \[($1,200/$1,083) - 1\].
    
2.  b
    
    Asset C is a contractual right to receive $700 in 2 years and has a market price of $566. Thus, the implied annual rate of return (that is, a 2-year market rate of return) is 11.2 percent \[($700/$566)^0.5 - 1\].
    
3.  c
    
    All three assets are comparable with respect to risk (that is, dispersion of possible payoffs and credit).

##### [820-10-55-34](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-34)

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On the basis of the timing of the contractual payments to be received for Asset A relative to the timing for Asset B and Asset C (that is, one year for Asset B versus two years for Asset C), Asset B is deemed more comparable to Asset A. Using the contractual payment to be received for Asset A ($800) and the 1-year market rate derived from Asset B (10.8 percent), the fair value of Asset A is $722 ($800/1.108). Alternatively, in the absence of available market information for Asset B, the one-year market rate could be derived from Asset C using the build-up methodology. In that case, the 2-year market rate indicated by Asset C (11.2 percent) would be adjusted to a 1-year market rate using the term structure of the risk-free yield curve. Additional information and analysis might be required to determine whether the risk premiums for one-year and two-year assets are the same. If it is determined that the risk premiums for one-year and two-year assets are not the same, the two-year market rate of return would be further adjusted for that effect.

##### [820-10-55-35](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-35)

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This Topic notes that a single valuation approach will be appropriate in some cases. In other cases, multiple valuation approaches will be appropriate. Cases A and B illustrate the use of multiple valuation approaches.

1.  a
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
2.  b
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-36](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-36)

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A reporting entity acquires a machine in a business combination. The machine will be held and used in its operations. The machine was originally purchased by the acquired entity from an outside vendor and, before the business combination, was customized by the acquired entity for use in its operations. However, the customization of the machine was not extensive. The acquiring entity determines that the asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (as installed or otherwise configured for use). There is no evidence to suggest that the current use of the machine is not its highest and best use. Therefore, the highest and best use of the machine is its current use in combination with other assets or with other assets and liabilities.

##### [820-10-55-37](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-37)

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The reporting entity determines that sufficient data are available to apply the [cost approach](https://asc.understandingaccounting.org/glossary/c/#cost-approach "A valuation approach that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).") and, because the customization of the machine was not extensive, the [market approach](https://asc.understandingaccounting.org/glossary/m/#market-approach "A valuation approach that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business."). The [income approach](https://asc.understandingaccounting.org/glossary/i/#income-approach "Valuation approaches that convert future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.") is not used because the machine does not have a separately identifiable income stream from which to develop reliable estimates of future cash flows. Furthermore, information about short-term and intermediate-term lease rates for similar used machinery that otherwise could be used to project an income stream (that is, lease payments over remaining service lives) is not available. The market and cost approaches are applied as follows:

1.  a
    
    The market approach is applied using quoted prices for similar machines adjusted for differences between the machine (as customized) and the similar machines. The measurement reflects the price that would be received for the machine in its current condition (used) and location (installed and configured for use). The fair value indicated by that approach ranges from $40,000 to $48,000.
    
2.  b
    
    The cost approach is applied by estimating the amount that would be required currently to construct a substitute (customized) machine of comparable utility. The estimate takes into account the condition of the machine and the environment in which it operates, including physical wear and tear (that is, physical deterioration), improvements in technology (that is, functional obsolescence), conditions external to the condition of the machine such as a decline in the market demand for similar machines (that is, economic obsolescence), and installation costs. The fair value indicated by that approach ranges from $40,000 to $52,000.

##### [820-10-55-38](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-38)

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The reporting entity determines that the higher end of the range indicated by the market approach is most representative of fair value and, therefore, ascribes more weight to the results of the market approach. That determination is made on the basis of the relative subjectivity of the inputs, taking into account the degree of comparability between the machine and the similar machines. In particular:

1.  a
    
    The inputs used in the market approach (quoted prices for similar machines) require fewer and less subjective adjustments than the inputs used in the cost approach.
    
2.  b
    
    The range indicated by the market approach overlaps with, but is narrower than, the range indicated by the cost approach.
    
3.  c
    
    There are no known unexplained differences (between the machine and the similar machines) within that range.
    

Accordingly, the reporting entity determines that the fair value of the machine is $48,000.

##### [820-10-55-38A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-38A)

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If customization of the machine was extensive or if there were not sufficient data available to apply the market approach (for example, because market data reflect transactions for machines used on a standalone basis, such as, a scrap value for specialized assets, rather than machines used in combination with other assets or with other assets and liabilities), the reporting entity would apply the cost approach. When an asset is used in combination with other assets or with other assets and liabilities, the cost approach assumes the sale of the machine to a market participant buyer with the complementary assets and the associated liabilities. The price received for the sale of the machine (that is, an exit price) would not be more than either of the following:

1.  a
    
    The cost that a market participant buyer would incur to acquire or construct a substitute machine of comparable utility
    
2.  b
    
    The economic benefit that a market participant buyer would derive from the use of the machine.

##### [820-10-55-39](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-39)

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A reporting entity acquires a group of assets. The asset group includes an income-producing software asset internally developed for licensing to customers and its complementary assets (including a related database with which the software asset is used) and the associated liabilities. To allocate the cost of the group to the individual assets acquired, the reporting entity measures the fair value of the software asset. The reporting entity determines that the software asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (that is, its complementary assets and the associated liabilities). There is no evidence to suggest that the current use of the software asset is not its highest and best use. Therefore, the highest and best use of the software asset is its current use. (In this case, the licensing of the software asset, in and of itself, does not indicate that the fair value of the asset would be maximized through its use by market participants on a standalone basis.)

##### [820-10-55-40](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-40)

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The reporting entity determines that, in addition to the income approach, sufficient data might be available to apply the cost approach but not the market approach. Information about market transactions for comparable software assets is not available. The income and cost approaches are applied as follows:

1.  a
    
    The income approach is applied using a present value technique. The cash flows used in that technique reflect the income stream expected to result from the software asset (license fees from customers) over its economic life. The fair value indicated by that approach is $15 million.
    
2.  b
    
    The cost approach is applied by estimating the amount that currently would be required to construct a substitute software asset of comparable utility (that is, taking into account functional and economic obsolescence). The fair value indicated by that approach is $10 million.

##### [820-10-55-41](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-41)

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Through its application of the cost approach, the reporting entity determines that market participants would not be able to construct a substitute software asset of comparable utility. Some characteristics of the software asset are unique, having been developed using proprietary information, and cannot be readily replicated. The reporting entity determines that the fair value of the software asset is $15 million, as indicated by the income approach.

##### [820-10-55-42](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-42)

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Example 4 illustrates the use of [Level 1 inputs](https://asc.understandingaccounting.org/glossary/l/#level-1-inputs "Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.") to measure the fair value of an asset that trades in different [active markets](https://asc.understandingaccounting.org/glossary/a/#active-market "A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.") at different prices.

##### [820-10-55-43](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-43)

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An asset is sold in two different active markets at different prices. A reporting entity enters into transactions in both markets and can access the price in those markets for the asset at the measurement date. In Market A, the price that would be received is $26, [transaction costs](https://asc.understandingaccounting.org/glossary/t/#transaction-costs "The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria: They result directly from and are essential to that transaction. They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell, as defined in paragraph 360-10-35-38).") in that market are $3, and the costs to transport the asset to that market are $2 (that is, the net amount that would be received is $21). In Market B, the price that would be received is $25, transaction costs in that market are $1, and the costs to transport the asset to that market are $2 (that is, the net amount that would be received in Market B is $22).

##### [820-10-55-44](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-44)

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If Market A is the [principal market](https://asc.understandingaccounting.org/glossary/p/#principal-market "The market with the greatest volume and level of activity for the asset or liability.") for the asset (that is, the market with the greatest volume and level of activity for the asset), the fair value of the asset would be measured using the price that would be received in that market, after taking into account [transportation costs](https://asc.understandingaccounting.org/glossary/t/#transportation-costs "The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.") ($24).

##### [820-10-55-45](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-45)

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If neither market is the principal market for the asset, the fair value of the asset would be measured using the price in the [most advantageous market](https://asc.understandingaccounting.org/glossary/m/#most-advantageous-market "The market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs."). The most advantageous market is the market that maximizes the amount that would be received to sell the asset after taking into account transaction costs and transportation costs (that is, the net amount that would be received in the respective markets).

##### [820-10-55-45A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-45A)

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Because the reporting entity would maximize the net amount that would be received for the asset in Market B ($22), the fair value of the asset would be measured using the price in that market ($25), less transportation costs ($2), resulting in a fair value measurement of $23. Although transaction costs are taken into account when determining which market is the most advantageous market, the price used to measure the fair value of the asset is not adjusted for those costs (although it is adjusted for transportation costs).

##### [820-10-55-46](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-46)

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This Topic (see paragraphs [820-10-30-3 through 30-3A](https://asc.understandingaccounting.org/asc/820/10/#820-10-30-3)) clarifies that in many cases the transaction price, that is, the price paid (received) for a particular asset (liability), will represent the fair value of that asset (liability) at initial recognition, but not presumptively. This Example illustrates when the price in a transaction involving a derivative instrument might (and might not) equal the fair value of the instrument at initial recognition.

##### [820-10-55-47](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-47)

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Entity A (a retail counterparty) enters into an interest rate swap in a retail market with Entity B (a dealer) for no initial consideration (that is, the transaction price is zero). Entity A can access only the retail market. Entity B can access both the retail market (that is, with retail counterparties) and the [dealer market](https://asc.understandingaccounting.org/glossary/d/#dealer-market "A market in which dealers stand ready to trade (either buy or sell for their own account), thereby providing liquidity by using their capital to hold an inventory of the items for which they make a market. Typically, bid and ask prices (representing the price at which the dealer is willing to buy and the price at which the dealer is willing to sell, respectively) are more readily available than closing prices. Over-the-counter markets (for which prices are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc.) are dealer markets. For example, the market for U.S. Treasury securities is a dealer market. Dealer markets also exist for some other assets and liabilities, including other financial instruments, commodities, and physical assets (for example, used equipment).") (that is, with dealer counterparties).

##### [820-10-55-48](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-48)

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From the perspective of Entity A, the retail market in which it initially entered into the swap is the principal market for the swap. If Entity A were to transfer its rights and obligations under the swap, it would do so with a dealer counterparty in that retail market. In that case, the transaction price (zero) would represent the fair value of the swap to Entity A at initial recognition, that is, the price that Entity A would receive to sell or pay to transfer the swap in a transaction with a dealer counterparty in the retail market (that is, an [exit price](https://asc.understandingaccounting.org/glossary/e/#exit-price "The price that would be received to sell an asset or paid to transfer a liability.")). That price would not be adjusted for any incremental (transaction) costs that would be charged by that dealer counterparty.

##### [820-10-55-49](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-49)

Pending content: no

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From the perspective of Entity B, the dealer market (not the retail market) is the principal market for the swap. If Entity B were to transfer its rights and obligations under the swap, it would do so with a dealer in that market. Because the market in which Entity B initially entered into the swap is different from the principal market for the swap, the transaction price (zero) would not necessarily represent the fair value of the swap to Entity B at initial recognition.

##### [820-10-55-50](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-50)

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[Paragraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-51](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-51)

Pending content: no

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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 characteristic of the asset and should be considered in measuring the fair value of the asset. Cases A and B illustrate the effect of restrictions when measuring the fair value of an asset.

1.  a
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
2.  b
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-52](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-52)

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Company X issues Class A shares through a sale on a national securities exchange or an over-the-counter market as well as through a private placement transaction. Because the Class A shares issued through the private placement are not registered and are legally restricted from being sold on a national securities exchange or an over-the-counter market until the shares are registered or the conditions necessary for an exemption from registration have been satisfied, a market participant would sell the private placement Class A shares in a different market than the market used for registered Class A shares on the measurement date. Because that restriction would be included within the unit of account of the equity security, a market participant would consider the inability to resell the security on a national securities exchange or an over-the-counter market when pricing the equity security; therefore, the reporting entity that holds the Class A shares acquired through a private placement transaction would consider that restriction a characteristic of the asset. In that case, the reporting entity should measure the fair value of the equity security on the basis of the market price of the similar unrestricted equity security adjusted to reflect the effect of the restriction. The adjustment will vary depending on all of the following:

1.  a
    
    The nature and remaining duration of the restriction
    
2.  b
    
    The extent to which buyers are limited by the restriction (for example, there might be a large number of qualifying investors)
    
3.  c
    
    Qualitative and quantitative factors specific to both the instrument and the issuer.

##### [820-10-55-52A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-52A)

Pending content: yes

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Effective as of: not established by retrieval timestamps.


A reporting entity holds Class A shares of Company X that are eligible for sale on a national securities exchange or an over-the-counter market. Separately, the reporting entity enters into a contractual arrangement in which it agrees that it will not sell the Class A shares for a certain time period. That arrangement may be referred to as a lock-up agreement or a market standoff agreement or may be the result of a provision within a separate agreement between certain shareholders (that is, separate from the legal documents that establish the rights and obligations of all holders of a particular class of stock). In that instance, the restriction is not included in the unit of account and therefore is not a characteristic of the asset. The equity security subject to the contractual sale restriction is identical to an equity security that is not subject to a contractual sale restriction. Therefore, consistent with the guidance in paragraphs [820-10-35-6B](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-6B) and [820-10-35-36B](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-36B), the fair value of the equity security subject to the contractual sale restriction should be measured on the basis of the market price of the same equity security without the contractual sale restriction and should not be adjusted to reflect the reporting entity’s inability to sell the equity security on the measurement date.

Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:

[820-10-65-14](https://asc.understandingaccounting.org/asc/820/10/#820-10-65-14)A reporting entity that is not an investment company within the scope of Topic 946holds Class A shares of Company X that are eligible for sale on a national securities exchange or an over-the-counter market. Separately, the reporting entity enters into a contractual arrangement in which it agrees that it will not sell the Class A shares for a certain time period. That arrangement may be referred to as a lock-up agreement or a market standoff agreement or may be the result of a provision within a separate agreement between certain shareholders (that is, separate from the legal documents that establish the rights and obligations of all holders of a particular class of stock). In that instance, the restriction is not included in the unit of account and therefore is not a characteristic of the asset. The equity security subject to the contractual sale restriction is identical to an equity security that is not subject to a contractual sale restriction. Therefore, consistent with the guidance in paragraphs [820-10-35-6B](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-6B) and [820-10-35-36BB](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-36BB), the fair value of the equity security subject to the contractual sale restriction should be measured on the basis of the market price of the same equity security without the contractual sale restriction and should not be adjusted to reflect the reporting entity’s inability to sell the equity security on the measurement date.

##### [820-10-55-52B](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-52B)

Pending content: yes

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Transition date:(P) December 16, 2027; (N) December 16, 2027Transition guidance:

[820-10-65-14](https://asc.understandingaccounting.org/asc/820/10/#820-10-65-14)Assume the same facts as in paragraph [820-10-55-52A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-52A), except that the reporting entity is an investment company within the scope of Topic 946. In that instance, the fair value of the equity security subject to the contractual sale restriction should be measured on the basis of the market price for an otherwise identical unrestricted equity security of the same issuer in the same market, adjusted to reflect the effect of the restriction in accordance with paragraph [820-10-35-36BBB](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-36BBB).

##### [820-10-55-53](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-53)

Pending content: yes

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


As discussed in paragraph [820-10-15-5](https://asc.understandingaccounting.org/asc/820/10/#820-10-15-5), this Topic applies for equity securities with restrictions that expire within one year that are measured at fair value in accordance with Subtopics 320-10 and 958-320.

Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:

[105-10-65-10](https://asc.understandingaccounting.org/asc/105/10/#105-10-65-10)As discussed in paragraph [820-10-15-5](https://asc.understandingaccounting.org/asc/820/10/#820-10-15-5), this Topic applies to equity securities with restrictions that expire within one year that are measured at fair value in accordance with Subtopics 321-10 and 958-321.

##### [820-10-55-54](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-54)

Pending content: no

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A 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 relevant documentation (for example, legal and other), the association determines that the fiduciary responsibility to meet the donor's restriction would not be transferred to market participants if the association sold the asset, that is, the donor restriction on the use of the land is specific to the association. Without the restriction on the use of the land by the association, the land could be used as a site for residential development. In addition, the land is subject to an easement (that is, a legal right that enables a utility to run power lines across the land). Following is an analysis of the effect on the fair value measurement of the land arising from the restriction and the easement:

1.  a
    
    Donor restriction on use of land. Because in this situation the donor restriction on the use of the land is specific to the association, the restriction would not be transferred to market participants. Therefore, the fair value of the land would be the higher of its fair value used as a playground (that is, the fair value of the asset would be maximized through its use by market participants in combination with other assets or with other assets and liabilities) and its fair value as a site for residential development (that is, the fair value of the asset would be maximized through its use by market participants on a standalone basis), regardless of the restriction on the use of the land by the association.
    
2.  b
    
    Easement for utility lines. Because the easement for utility lines is specific to (that is, a characteristic of) the land, it would be transferred to market participants with the land. Therefore, the fair value measurement of the land would take into account the effect of the easement, regardless of whether the highest and best use is as a playground or as a site for residential development.

##### [820-10-55-55](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-55)

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The donor restriction, which is legally binding on the association, would be indicated through classification of the associated net assets and disclosure of the nature of the restriction in accordance with paragraphs

[958-210-45-8 through 45-9](https://asc.understandingaccounting.org/asc/210/958/#210-958-45-8)

, [958-210-50-1](https://asc.understandingaccounting.org/asc/210/958/#210-958-50-1), and [958-210-50-3](https://asc.understandingaccounting.org/asc/210/958/#210-958-50-3).

##### [820-10-55-55A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-55A)

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A fair value measurement of a liability assumes that the liability, whether it is a financial liability or a nonfinancial liability, is transferred to a market participant at the measurement date (that is, the liability would remain outstanding and the market participant transferee would be required to fulfill the obligation; it would not be settled with the counterparty or otherwise extinguished on the measurement date).

##### [820-10-55-56](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-56)

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The fair value of a liability reflects the effect of nonperformance risk. Nonperformance risk relating to a liability includes, but may not be limited to, the reporting entity's own credit risk. A reporting entity takes into account the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability is measured at fair value because those that hold the reporting entity's obligations as assets would take into account the effect of the reporting entity's credit standing when estimating the prices they would be willing to pay. Cases A-E illustrate the measurement of liabilities and the effect of nonperformance risk (including a reporting entity's own credit risk) on a fair value measurement.

1.  a
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
2.  b
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-57](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-57)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:49dc77cdd85acd7a7e51d3b3030fb76c025ca3ac4d2cff695b8bdaabaec71add

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This Case has the following assumptions:

1.  a
    
    Entity X and Entity Y each enter into a contractual obligation to pay cash ($500) to Entity Z in 5 years.
    
2.  b
    
    Entity X has a AA credit rating and can borrow at 6 percent, and Entity Y has a BBB credit rating and can borrow at 12 percent.
    
3.  c
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).
    
4.  d
    
    [Subparagraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-57A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-57A)

Pending content: no

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Entity X will receive about $374 in exchange for its promise (the present value of $500 in 5 years at 6 percent). Entity Y will receive about $284 in exchange for its promise (the present value of $500 in 5 years at 12 percent). The fair value of the liability to each entity (that is, the proceeds) incorporates that reporting entity's credit standing.

##### [820-10-55-58](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-58)

Pending content: no

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Effective as of: not established by retrieval timestamps.


[Paragraph superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/updates/asu-2011-04/).

##### [820-10-55-59](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:097268d0fd56926da18603cad665e6318223f576041cc84b5c61da7ffb2a505e

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On January 1, 20X7, Entity A, an investment bank with a AA credit rating, issues a five-year fixed rate note to Entity B. The contractual principal amount to be paid by Entity A at maturity is linked to the Standard and Poor's S&P 500 index. No credit enhancements are issued in conjunction with or otherwise related to the contract (that is, no collateral is posted and there is no third-party guarantee). Entity A elects to account for the entire note at fair value in accordance with paragraph [815-15-25-4](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-4). The fair value of the note (that is, the obligation of Entity A) during 20X7 is measured using an expected present value technique. Changes in fair value are as follows:

1.  a
    
    Fair value at January 1, 20X7. The expected cash flows used in the expected present value technique are discounted at the risk-free rate using the treasury yield curve at January 1, 20X7, plus the current market observable AA corporate bond spread to treasuries, if nonperformance risk is not already reflected in the cash flows, adjusted (either up or down) for Entity A's specific credit risk (that is, resulting in a credit-adjusted risk-free rate). Therefore, the fair value of Entity A's obligation at initial recognition takes into account nonperformance risk, including that reporting entity's credit risk, which presumably is reflected in the proceeds.
    
2.  b
    
    Fair value at March 31, 20X7. During March 20X7, the credit spread for AA corporate bonds widens, with no changes to the specific credit risk of Entity A. The expected cash flows used in the expected present value technique are discounted at the risk-free rate using the treasury yield curve at March 31, 20X7, plus the current market observable AA corporate bond spread to treasuries if nonperformance risk is not already reflected in the cash flows, adjusted for Entity A's specific credit risk (that is, resulting in a credit-adjusted risk-free rate). Entity A's specific credit risk is unchanged from initial recognition. Therefore, the fair value of Entity A's obligation changes as a result of changes in credit spreads generally. Changes in credit spreads reflect current market participant assumptions about changes in nonperformance risk generally, changes in liquidity risk, and the compensation required for assuming those risks.
    
3.  c
    
    Fair value at June 30, 20X7. As of June 30, 20X7, there have been no changes to the AA corporate bond spreads. However, on the basis of structured note issues corroborated with other qualitative information, Entity A determines that its own specific creditworthiness has strengthened within the AA credit spread. The expected cash flows used in the expected present value technique are discounted at the risk-free rate using the treasury yield curve at June 30, 20X7, plus the current market observable AA corporate bond spread to treasuries (unchanged from March 31, 20X7), if nonperformance risk is not already reflected in the cash flows, adjusted for Entity A's specific credit risk (that is, resulting in a credit-adjusted risk-free rate). Therefore, the fair value of the obligation of Entity A changes as a result of the change in its own specific credit risk within the AA corporate bond spread.

##### [820-10-55-59A](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59A)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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[Paragraphs 820-10-55-59A through 55-59I superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59A).

##### [820-10-55-59J](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59J)

Pending content: no

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[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-59K](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59K)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:237d3172a65e6c0d7d8cb2be12f7d19b2bf97ede89cbe75d6209576ed6f76534

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-59L](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59L)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:6ccdce6211022bd771f61b9d0c67c8274517bc6dc365bb2d022b78676993b58f

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-59M](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-59M)

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[Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/).

##### [820-10-55-60](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-60)

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[Paragraphs 820-10-55-60 through 55-76 superseded by Accounting Standards Update No. 2011-04](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-60).

##### [820-10-55-77](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-77)

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On January 1, 20X1, Entity A assumes an asset retirement obligation in a business combination. The reporting entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be 10 years.

##### [820-10-55-78](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-78)

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On the basis of paragraph [410-20-30-1](https://asc.understandingaccounting.org/asc/410/20/#410-20-30-1), Entity A uses the expected present value technique to measure the fair value of the asset retirement obligation.

##### [820-10-55-79](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-79)

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If Entity A was contractually allowed to transfer its asset retirement obligation to a market participant, Entity A concludes that a market participant would use all of the following inputs, probability-weighted as appropriate, when estimating the price it would expect to receive:

1.  a
    
    Labor costs
    
2.  b
    
    Allocation of overhead costs
    
3.  c
    
    The compensation that a market participant would require for undertaking the activity and for assuming the risk associated with the obligation to dismantle and remove the asset. Such compensation includes both of the following:
    
    1.  1
        
        Profit on labor and overhead costs
        
    2.  2
        
        The risk that the actual cash outflows might differ from those expected, excluding inflation.
        
4.  d
    
    Effect of inflation on estimated costs and profits
    
5.  e
    
    Time value of money, represented by the risk-free rate
    
6.  f
    
    Nonperformance risk relating to the risk that Entity A will not fulfill the obligation, including Entity A's own credit risk.

##### [820-10-55-80](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-80)

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The significant assumptions used by Entity A to measure fair value are as follows:

1.  a
    
    Labor costs are developed on the basis of current marketplace wages, adjusted for expectations of future wage increases, required to hire contractors to dismantle and remove offshore oil platforms. Entity A assigns probability assessments to a range of cash flow estimates as follows.
    
    -   ![](https://asc.understandingaccounting.org/asc-img/GUID-D1905274-C9CA-4032-906E-9C1231E16589-low.gif)
        
        "Cash Flow Estimate" Probability Assessment Expected Cash Flows " $100,000 " 25% " $25,000 " " $125,000 " 50% " 62,500 " " $175,000 " 25% " 43,750 " " $131,250 "
        
    
    The probability assessments are developed on the basis of Entity A's experience with fulfilling obligations of this type and its knowledge of the market.
    
2.  b
    
    Entity A estimates allocated overhead and equipment operating costs using the rate it applies to labor costs (80 percent of expected labor costs). This is consistent with the cost structure of market participants.
    
3.  c
    
    Entity A estimates the compensation that a market participant would require for undertaking the activity and for assuming the risk associated with the obligation to dismantle and remove the asset as follows:
    
    1.  1
        
        A third-party contractor typically adds a markup on labor and allocated internal costs to provide a profit margin on the job. The profit margin used (20 percent) represents Entity A's understanding of the operating profit that contractors in the industry generally earn to dismantle and remove offshore oil platforms. Entity A concludes that this rate is consistent with the rate that a market participant would require as compensation for undertaking the activity.
        
    2.  2
        
        A contractor would typically require compensation for the risk that the actual cash outflows might differ from those expected because of the uncertainty inherent in locking in today's price for a project that will not occur for 10 years. Entity A estimates the amount of that premium to be 5 percent of the expected cash flows, including the effect of inflation.
        
4.  d
    
    Entity A assumes a rate of inflation of 4 percent over the 10-year period on the basis of available market data.
    
5.  e
    
    The risk-free rate of interest for a 10-year maturity on January 1, 20X1, is 5 percent. Entity A adjusts that rate by 3.5 percent to reflect its risk of nonperformance (that is, the risk that it will not fulfill the obligation), including its credit risk. Therefore, the discount rate used to compute the present value of the cash flows is 8.5 percent.

##### [820-10-55-81](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-81)

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Entity A concludes that its assumptions would be used by market participants. In addition, Entity A does not adjust its fair value measurement for the existence of a restriction preventing it from transferring the liability. As illustrated in the following table, Entity A measures the fair value of its liability for the asset retirement obligation as $194,879.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-351A6116-330B-4616-854A-A4BC5EB9B9A0-low.gif)
    
    Expected Cash Flows 1/1/X1 Expected labor costs " $131,250 " "Allocated overhead and equipment costs (.80 x $131,250)" " $105,000 " "Contractor's profit markup \[.20 x ($131,250 + $105,000)\]" " $47,250 " Expected cash flows before inflation adjustment " $283,500 " Inflation factor (4% for 10 years) 1.4802 Expected cash flows adjusted for inflation " $419,637 " "Market risk premium (.05 x $419,637)" " $20,982 " Expected cash flows adjusted for market risk " $440,619 " Expected present value using discount rate of 8.5% for 10 years " $194,879 "

##### [820-10-55-82](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-82)

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On January 1, 20X1, Entity B issues at par a $2 million BBB-rated exchange-traded 5-year fixed-rate debt instrument with an annual 10 percent coupon. Entity B has elected to account for this instrument using the fair value option.

##### [820-10-55-83](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-83)

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On December 31, 20X1, the instrument is trading as an asset in an active market at $929 per $1,000 of par value after payment of accrued interest. Entity B uses the quoted price of the asset in an active market as its initial input into the fair value measurement of its liability ($929 × \[$2 million ÷ $1,000\] = $1,858,000).

##### [820-10-55-84](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-84)

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In determining whether the quoted price of the asset in an active market represents the fair value of the liability, Entity B evaluates whether the quoted price of the asset includes the effect of factors not applicable to the fair value measurement of a liability, for example, whether the quoted price of the asset includes the effect of a third-party credit enhancement that would be separately accounted for from the perspective of the issuer. Entity B determines that no adjustments are required to the quoted price of the asset. Accordingly, Entity B concludes that the fair value of its debt instrument at December 31, 20X1, is $1,858,000. Entity B categorizes and discloses the fair value measurement of its debt instrument within Level 1 of the fair value hierarchy.

##### [820-10-55-85](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-85)

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On January 1, 20X1, Entity C issues at par in a private placement a $2 million BBB-rated 5-year fixed-rate debt instrument with an annual 10 percent coupon. Entity C has elected to account for this instrument using the fair value option.

##### [820-10-55-86](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-86)

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At December 31, 20X1, Entity C still carries a BBB credit rating. Market conditions, including available interest rates, credit spreads for a BBB-quality credit rating and liquidity, remain unchanged from the date the debt instrument was issued. However, Entity C's credit spread has deteriorated by 50 basis points because of a change in its risk of nonperformance. After taking into account all market conditions, Entity C concludes that if it was to issue the instrument at the measurement date, the instrument would bear a rate of interest of 10.5 percent or Entity C would receive less than par in proceeds from the issue of the instrument.

##### [820-10-55-87](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-87)

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For the purpose of this example, the fair value of Entity C's liability is calculated using a present value technique. Entity C concludes that a market participant would use all of the following inputs (consistent with paragraph [820-10-55-5](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-5)) when estimating the price the market participant would expect to receive to assume Entity C's obligation:

1.  a
    
    The terms of the debt instrument, including all of the following:
    
    1.  1
        
        Coupon rate of 10 percent
        
    2.  2
        
        Principal amount of $2 million
        
    3.  3
        
        Term of 4 years.
        
2.  b
    
    The market rate of interest of 10.5 percent (which includes a change of 50 basis points in the risk of nonperformance from the date of issue).

##### [820-10-55-88](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-88)

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On the basis of its present value technique, Entity C concludes that the fair value of its liability at December 31, 20X1, is $1,968,641.

##### [820-10-55-89](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-89)

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Entity C does not include any additional input into its present value technique for risk or profit that a market participant might require for compensation for assuming the liability. Because Entity C's obligation is a financial liability, Entity C concludes that the interest rate already captures the risk or profit that a market participant would require as compensation for assuming the liability. Furthermore, Entity C does not adjust its present value technique for the existence of a restriction preventing it from transferring the liability.

##### [820-10-55-90](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-90)

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This Example illustrates the use of judgment when measuring the fair value of a [financial asset](https://asc.understandingaccounting.org/glossary/f/#financial-asset "Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following: Receive cash or another financial instrument from a second entity Exchange other financial instruments on potentially favorable terms with the second entity.") when there has been a significant decrease in the volume or level of activity for the asset when compared with normal market activity for the asset (or similar assets). (See paragraphs

[820-10-35-54C through 35-54H](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-54C)

.) This Example has all of the following assumptions:

1.  a
    
    Entity A invests in a junior AAA-rated tranche of a residential mortgage-backed security on January 1, 20X8 (the issue date of the security).
    
2.  b
    
    The junior tranche is the third most senior of a total of seven tranches.
    
3.  c
    
    The underlying collateral for the residential mortgage-backed security is unguaranteed nonconforming residential mortgage loans that were issued in the second half of 20X6.
    
4.  d
    
    At March 31, 20X9 (the measurement date), the junior tranche is now A-rated. This tranche of the residential mortgage-backed security was previously traded through a [brokered market](https://asc.understandingaccounting.org/glossary/b/#brokered-market "A market in which brokers attempt to match buyers with sellers but do not stand ready to trade for their own account. In other words, brokers do not use their own capital to hold an inventory of the items for which they make a market. The broker knows the prices bid and asked by the respective parties, but each party is typically unaware of another party's price requirements. Prices of completed transactions are sometimes available. Brokered markets include electronic communication networks, in which buy and sell orders are matched, and commercial and residential real estate markets."). However, trading volume in that market was infrequent, with only a few transactions taking place per month from January 1, 20X8, to June 30, 20X8, and little, if any, trading activity during the nine months before March 31, 20X9.

##### [820-10-55-91](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-91)

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Entity A takes into account the factors in paragraph [820-10-35-54C](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-54C) to determine whether there has been a significant decrease in the volume or level of activity for the junior tranche of the residential mortgage-backed security in which it has invested. After evaluating the significance and relevance of the factors, Entity A concludes that the volume and level of activity of the junior tranche of the residential mortgage-backed security have significantly decreased. Entity A supported its judgment primarily on the basis that there was little, if any, trading activity for an extended period before the measurement date.

##### [820-10-55-92](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-92)

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Because there is little, if any, trading activity to support a valuation technique using a market approach, Entity A decides to use an income approach using the discount rate adjustment technique described beginning in paragraph [820-10-55-10](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-10) to measure the fair value of the residential mortgage-backed security at the measurement date. (See also paragraphs [820-10-35-36 through 35-36A](https://asc.understandingaccounting.org/asc/820/10/#820-10-35-36).) Entity A uses the contractual cash flows from the residential mortgage-backed security. The discount rate adjustment technique described beginning in paragraph [820-10-55-10](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-10) would not be appropriate when determining whether there has been a credit loss and/or a change in yield in accordance with paragraph [325-40-35-4](https://asc.understandingaccounting.org/asc/325/40/#325-40-35-4) when that technique uses contractual cash flows rather than most likely cash flows.

##### [820-10-55-93](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-93)

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Entity A then estimates a discount rate (that is, a market rate of return) to discount those contractual cash flows. The market rate of return is estimated using both of the following:

1.  a
    
    The risk-free rate of interest
    
2.  b
    
    Estimated adjustments for differences between the available market data and the junior tranche of the residential mortgage-backed security in which Entity A has invested. Those adjustments reflect available market data about expected nonperformance and other risks (for example, default risk, collateral value risk, and liquidity risk) that market participants would take into account when pricing the asset in an orderly transaction at the measurement date under current market conditions.

##### [820-10-55-94](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-94)

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Entity A took into account the following information when estimating the adjustments in the preceding paragraph:

1.  a
    
    The credit spread for the junior tranche of the residential mortgage-backed security at the issue date as implied by the original transaction price
    
2.  b
    
    The change in credit spread implied by any observed transactions from the issue date to the measurement date for comparable residential mortgage-backed securities or on the basis of relevant indices
    
3.  c
    
    The characteristics of the junior tranche of the residential mortgage-backed security compared with comparable residential mortgage-backed securities or indices, including all of the following:
    
    1.  1
        
        The quality of the underlying assets, that is, information about all of the following:
        
        1.  i
            
            Delinquency rates
            
        2.  ii
            
            Foreclosure rates
            
        3.  iii
            
            Loss experience
            
        4.  iv
            
            Prepayment rates.
            
    2.  2
        
        The seniority or subordination of the residential mortgage-backed security tranche held
        
    3.  3
        
        Other relevant factors.
        
4.  d
    
    Relevant reports issued by analysts and rating agencies
    
5.  e
    
    Quoted prices from third parties such as brokers or pricing services.

##### [820-10-55-95](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-95)

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Entity A estimates that one indication of the market rate of return that market participants would use when pricing the junior tranche of the residential mortgage-backed security is 12 percent (1,200 basis points). This market rate of return was estimated as follows:

1.  a
    
    Begin with 300 basis points for the relevant risk-free rate of interest at March 31, 20X9.
    
2.  b
    
    Add 250 basis points for the credit spread over the risk-free rate when the junior tranche was issued in January 20X8.
    
3.  c
    
    Add 700 basis points for the estimated change in the credit spread over the risk-free rate of the junior tranche between January 1, 20X8, and March 31, 20X9. This estimate was developed on the basis of the change in the most comparable index available for that time period.
    
4.  d
    
    Subtract 50 basis points (net) to adjust for differences between the index used to estimate the change in credit spreads and the junior tranche. The referenced index consists of subprime mortgage loans, whereas Entity A's residential mortgage-backed security consists of similar mortgage loans with a more favorable credit profile (making it more attractive to market participants). However, the index does not reflect an appropriate liquidity risk premium for the junior tranche under current market conditions. Thus, the 50 basis point adjustment is the net of two adjustments.
    
    1.  1
        
        The first adjustment is a 350 basis point subtraction, which was estimated by comparing the implied yield from the most recent transactions for the residential mortgage-backed security in June 20X8 with the implied yield in the index price on those same dates. There was no information available that indicated that the relationship between Entity A's security and the index has changed.
        
    2.  2
        
        The second adjustment is a 300 basis point addition, which is Entity A's best estimate of the additional liquidity risk inherent in its security (a cash position) when compared with the index (a synthetic position). This estimate was derived after taking into account liquidity risk premiums implied in recent cash transactions for a range of similar securities.

##### [820-10-55-96](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-96)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


As an additional indication of the market rate of return, Entity A also takes into account 2 recent indicative quotes (that is, nonbinding quotes) provided by reputable brokers for the junior tranche of the residential mortgage-backed security that imply yields of 15 to 17 percent. Entity A is unable to evaluate the valuation technique(s) or inputs used to develop the quotes. However, Entity A is able to confirm that the quotes do not reflect the results of transactions.

##### [820-10-55-97](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-97)

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Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


Because Entity A has multiple indications of the market rate of return that market participants would take into account when measuring fair value, it evaluates and weights the respective indications of the rate of return, considering the reasonableness of the range indicated by the results.

##### [820-10-55-98](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-98)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


Entity A concludes that 13 percent is the point within the range of indications that is most representative of fair value under current market conditions. Entity A places more weight on the 12 percent indication (that is, its own estimate of the market rate of return) for the following reasons:

1.  a
    
    Entity A concluded that its own estimate appropriately incorporated the risks (for example, default risk, collateral value risk, and liquidity risk) that market participants would use when pricing the asset in an orderly transaction under current market conditions.
    
2.  b
    
    The broker quotes were nonbinding and did not reflect the results of transactions, and Entity A was unable to evaluate the valuation technique(s) or inputs used to develop the quotes.

##### [820-10-55-99](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-99)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


The disclosures required by paragraphs [820-10-50-1D](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-1D), [820-10-50-2(a) through (b), (bbb) through (d), and (g)](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2), [820-10-50-6A](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-6A), and [820-10-50-8](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-8) are illustrated by the following Cases:

1.  a
    
    Assets measured at fair value (Case A)
    
2.  b
    
    Reconciliation of fair value measurements categorized within Level 3 of the fair value hierarchy (Case B)
    
3.  c
    
    Information about fair value measurements categorized within Level 3 of the fair value hierarchy (Case C)
    
4.  d
    
    Fair value measurements of investments that are measured at net asset value per share (or its equivalent) as a practical expedient (Case D).

##### [820-10-55-100](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-100)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Effective as of: not established by retrieval timestamps.


For assets and liabilities measured at fair value at the reporting date, this Topic requires quantitative disclosures about the fair value measurements for each class of assets and liabilities at the end of the reporting period. Sufficient information must be provided to permit reconciliation of the fair value of assets categorized within the fair value hierarchy to the amounts presented in the statement of financial position. A reporting entity might disclose the following for assets to comply with paragraph [820-10-50-2(a) through (b)](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2) and paragraph [820-10-50-2B](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2B).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-D4966912-A7D3-4152-8545-90AB2C4669CB-low.gif)
    
    ($ in millions) Fair Value Measurements at the End of the Reporting Period Using 12/31/X9 "Quoted Prices in Active Markets for Identical Assets (Level 1)" "Significant Other Observable Inputs (Level 2)" "Significant Unobservable Inputs (Level 3)" Total Gains (Losses) Description Recurring fair value measurements Equity securities (a) Equity securities—real estate industry $93 $70 $23 Equity securities—oil and gas industry 45 45 Equity securities—financial services industry 150 150 Equity securities—healthcare industry 110 110 Equity securities—other 30 30 Total equity securities $428 $405 $23 Available-for-sale debt securities Residential mortgage-backed securities $149 $24 $125 Commercial mortgage-backed securities 50 50 Collateralized debt obligations 35 35 U.S. Treasury securities 85 $85 Corporate bonds 93 93 Total available-for-sale debt securities $412 $85 $117 $210 Hedge fund investments Equity long/short $55 $ 55 Global opportunities 35 35 High-yield debt securities 90 $90 Hedge fund investments measured at net asset value (f) 30 Total hedge fund investments $210 $90 $90 Other investments Private equity fund investments (b) $ 25 $25 Direct venture capital: healthcare (a) 53 53 Direct venture capital: energy (a) 32 32 Other investments measured at net asset value (f) 45 Total other investments 155 110 Derivatives Interest rate contracts 57 $57 Foreign exchange contracts 43 43 Credit contracts 38 38 Commodity futures contracts 78 $78 Commodity forward contracts 20 20 Total derivatives $236 $78 $120 $38 Total recurring fair value measurements " $1,441 " $568 $350 $448 Nonrecurring fair value measurements Long-lived assets held and used (c) $75 $75 $(25) Goodwill (d) 30 $30 (35) Long-lived assets held for sale (e) 26 26 (15) Total nonrecurring fair value measurements $131 $101 $30 $(75) (a) "On the basis of its analysis of the nature, characteristics, and risks of the securities, the reporting entity has determined that presenting them by industry is appropriate." (b) "On the basis of its analysis of the nature, characteristics, and risks of the investments, the reporting entity has determined that presenting them as a single class is appropriate." (c) "In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $100 million were written down to their fair value of $75 million, resulting in an impairment charge of $25 million, which was included in earnings for the period." (d) "In accordance with Subtopic 350-20, goodwill with a carrying amount of $65 million was written down to its implied fair value of $30 million, resulting in an impairment charge of $35 million, which was included in earnings for the period." (e) "In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying amount of $35 million were written down to their fair value of $26 million, less costs to sell of $6 million (or $20 million), resulting in a loss of $15 million, which was included in earnings for the period." "(Note: For liabilities, a similar table should be presented.)"

##### [820-10-55-101](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-101)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:51714724836ebcf3801d0e4e2559b6c5b80763ef009a766e4c6acecd93301ba0

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, this Topic requires a reconciliation from the opening balances to the closing balances for each class of assets and liabilities, except for derivative assets and liabilities, which may be presented net. A reporting entity might disclose the following for assets to comply with paragraph [820-10-50-2(c) through (d)](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-551991CA-6D29-472B-917E-4A0CBBDD4BCF-low.gif)
    
    ($ in 000s) Assets Measured on a Recurring Basis Using Significant Unobservable Inputs (Level 3) ($ in millions) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Available-for-Sale Debt Securities Hedge Fund Investments Other Investments Derivatives Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Collateralized Debt Obligations High-Yield Debt Securities Private Equity Fund Direct Venture Capital: Healthcare Direct Venture Capital: Energy " Credit Contracts" Total Opening balance $105 $39 $25 $145 $20 $49 $ 28 $30 $441 Transfers into Level 3 60 (a) (b) 60 Transfers out of Level 3 (5) (b) (c) (5) Total gains or losses for the period "Included in earnings (or changes in net assets)" (8) 7 5 3 1 5 13 "Included in other comprehensive income " (15) (5) (7) (5) (32) "Purchases, issues, sales, and settlements" Purchases 16 17 5 3 18 59 Issues Sales (12) (62) (4) (78) Settlements (10) (10) Closing balance $125 $50 $35 $90 $25 $53 $32 $38 $448 Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period $(5) $5 $3 $1 $2 $6 Change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period $(10) $(5) $(7) $(24) (a) "Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from a decrease in market activity for the securities." (b) Footnote superseded by Accounting Standards Update No. 2018-13. (c) Transferred from Level 3 to Level 2 because observable market data became available for the securities. "(Note: For liabilities, a similar table should be presented.)"

##### [820-10-55-102](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-102)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

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Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Gains and losses included in earnings (or changes in net assets) for the period (above) are presented in trading revenues and in other revenues as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-64A4BAF1-3E15-49DA-B4D0-CCF91162A744-low.gif)
    
    Trading Revenues Other Revenues Total gains or losses for the period included in earnings (or changes in net assets) $ 5 $ 8 Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period $ 2 $ 4 "(Note: For liabilities, a similar table should be presented.)"

##### [820-10-55-103](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-103)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:2e907a1732da6c062454a44d5ba457d6e4c05ee163b21740e5699b9ba8febaac

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, this Topic requires a reporting entity to disclose a description of the valuation technique(s) and the inputs used in the fair value measurement. For fair value measurements categorized within Level 3 of the fair value hierarchy, information about the significant unobservable inputs used must be quantitative. A reporting entity might disclose the following for assets to comply with the requirement to disclose the significant unobservable inputs used in the fair value measurement in accordance with paragraph [820-10-50-2(bbb)](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-E1D44640-8108-4E72-9756-7635555A54C6-low.gif)
    
    Quantitative Information about Level 3 Fair Value Measurements ($ in millions) Fair Value at 12/31/X9 Valuation Technique(s) Unobservable Input Range (Weighted Average) (e) Residential mortgage-backed securities 125 Discounted cash flow Constant prepayment rate 3.5% - 5.5% (4.5%) Probability of default 5% - 50% (10%) Loss severity 40% - 100% (60%) Commercial mortgage-backed securities 50 Discounted cash flow Constant prepayment rate 3.0% - 5.0% (4.1%) Probability of default 2% - 25% (5%) Loss severity 10% - 50% (20%) Collateralized debt obligations 35 Consensus pricing Offered quotes 20 - 45 (30) Comparability adjustments (%) -10% - +15% (+5%) Direct venture capital investments: healthcare 53 Discounted cash flow Weighted average cost of capital 7% - 16% (12.1%) Long-term revenue growth rate 2% - 5% (4.2%) Long-term pretax operating margin 3% - 20% (10.3%) Discount for lack of marketability (a) 5% - 20% (17%) Control premium (a) 10% - 30% (20%) Market comparable companies EBITDA multiple (b) 10 - 13 (11.3) Revenue multiple (b) 1.5 - 2.0 (1.7) Discount for lack of marketability (a) 5% - 20% (17%) Control premium (a) 10% - 30% (20%) Direct venture capital investments: energy 32 Discounted cash flow Weighted average cost of capital 8% - 12% (11.1%) Long-term revenue growth rate 3% - 5.5% (4.2%) Long-term pretax operating margin 7.5% - 13% (9.2%) Discount for lack of marketability (a) 5% - 20% (10%) Control premium (a) 10% - 20% (12%) Market comparable companies EBITDA multiple (b) 6.5 - 12 (9.5) Revenue multiple (b) 1.0 - 3.0 (2.0) Discount for lack of marketability (a) 5% - 20% (10%) Control premium (a) 10% - 20% (12%) Credit contracts 38 Option model Annualized volatility of credit (c) 10% - 20% (13%) Counterparty credit risk (d) 0.5% - 3.5% (2.2%) Own credit risk (d) 0.3% - 2.0% (0.7%) (a) Represents amounts used when the reporting entity has determined that market participants would take into account these premiums and discounts when pricing the investments. (b) Represents amounts used when the reporting entity has determined that market participants would use such multiples when pricing the investments. (c) Represents the range of the volatility curves used in the valuation analysis that the reporting entity has determined market participants would use when pricing the contracts. (d) Represents the range of the credit default swap spread curves used in the valuation analysis that the reporting entity has determined market participants would use when pricing the contracts. "(e) Unobservable inputs were weighted by the relative fair value of the instruments. For credit contracts, the average represents the arithmetic average of the inputs and is " not weighted by the relative fair value or notional amount. "(Note: For liabilities, a similar table should be presented.)"

##### [820-10-55-104](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-104)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:db984e5754f36a65247dc0a385391afaf3bde6c5b109c0bf2fcb9651de3ac706

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


In addition, a reporting entity should provide additional information that will help users of its financial statements to evaluate the quantitative information disclosed. A reporting entity might disclose some or all of the following to comply with paragraph [820-10-50-1D](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-1D):

1.  a
    
    The nature of the item being measured at fair value, including the characteristics of the item being measured that are taken into account in the determination of relevant inputs. For example, for residential mortgage-backed securities, a reporting entity might disclose the following:
    
    1.  1
        
        The types of underlying loans (for example, prime loans or subprime loans)
        
    2.  2
        
        Collateral
        
    3.  3
        
        Guarantees or other credit enhancements
        
    4.  4
        
        Seniority level of the tranches of securities
        
    5.  5
        
        The year of issue
        
    6.  6
        
        The weighted-average coupon rate of the underlying loans and the securities
        
    7.  7
        
        The weighted-average maturity of the underlying loans and the securities
        
    8.  8
        
        The geographical concentration of the underlying loans
        
    9.  9
        
        Information about the credit ratings of the securities.
        
2.  b
    
    How third-party information such as broker quotes, pricing services, net asset values, and relevant market data was taken into account when measuring fair value.

##### [820-10-55-105](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-105)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:82bd9e25405214885fa406a6ef7c64ff14dbe0bc0880f84a509a6b29bc3aa4d6

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


[Paragraph superseded by Accounting Standards Update No. 2018-13](https://asc.understandingaccounting.org/updates/asu-2018-13/).

##### [820-10-55-106](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-106)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:d46025ee3232e9b2f95557c14fb9dcb92518a99274b98c1e6572c3667186f5fa

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, this Topic requires a reporting entity to provide a narrative description of the uncertainty of the fair value measurement at the reporting date from the use of significant unobservable inputs, if those inputs reasonably could have been different at the reporting date, and a description of any interrelationships among the unobservable inputs used in the fair value measurement, which might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. A reporting entity might disclose the following about its residential mortgage-backed securities to comply with paragraph [820-10-50-2(g)](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-2).

-   The significant unobservable inputs used in the fair value measurement of the reporting entity's residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would have resulted in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

##### [820-10-55-107](https://asc.understandingaccounting.org/asc/820/10/#820-10-55-107)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:43:36.402Z to 2026-09-10T01:43:36.402Z

Record version: sha256:2dbc37940e89a0f70d6dbd5aeb22ecdeae5024027187cad67f1cdb125e905703

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


For investments that are within the scope of paragraphs

[820-10-15-4 through 15-5](https://asc.understandingaccounting.org/asc/820/10/#820-10-15-4)

and that are measured at fair value using net asset value per share as a practical expedient, this Topic requires a reporting entity to disclose information that helps users to understand the nature, characteristics, and risks of the investments by class and whether the investments, if sold, are probable of being sold at amounts different from net asset value per share (or its equivalent, such as member units or an ownership interest in partners' capital to which a proportionate share of net assets is attributed) (see paragraph [820-10-50-6A](https://asc.understandingaccounting.org/asc/820/10/#820-10-50-6A)). That information may be presented as follows. (The classes presented below are provided as examples only and are not intended to be treated as a template. The classes disclosed should be tailored to the nature, characteristics, and risks of the reporting entity's investments.)

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-C3370C2A-3873-4296-A4ED-2F6CA3862959-low.gif)
    
    "Fair Value (in millions)" "Unfunded Commitments " Redemption Frequency (If Currrently Eligible) Redemption Notice Period Equity long/short hedge funds (a) $55 quarterly 30-60 days "Event driven hedge funds (b)" 45 "quarterly, annually" 30-60 days "Global opportunities hedge funds (c) " 35 quarterly 30-45 days "Multi-strategy hedge funds (d)" 40 quarterly 30-60 days Real estate funds (e) 47 $20 Total $ 222 $ 20
    

1.  a
    
    This class includes investments in hedge funds that invest both long and short primarily in U.S. common stocks. Management of the hedge funds has the ability to shift investments from value to growth strategies, from small to large capitalization stocks, and from a net long position to a net short position. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. Investments representing approximately 22 percent of the value of the investments in this class cannot be redeemed because the investments include restrictions that do not allow for redemption in the first 12 to 18 months after acquisition. The remaining restriction period for these investments ranged from three to seven months at December 31, 20X3.
    
2.  b
    
    This class includes investments in hedge funds that invest in approximately 60 percent equities and 40 percent bonds to profit from economic, political, and government driven events. A majority of the investments are targeted at economic policy decisions. The fair values of the investments in this class have been estimated using the net asset value per share of the investments.
    
3.  c
    
    This class includes investments in hedge funds that hold approximately 80 percent of the funds' investments in non-U.S. common stocks in the healthcare, energy, information technology, utilities, and telecommunications sectors and approximately 20 percent of the funds' investments in diversified currencies. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. For one investment, valued at $8.75 million, a gate has been imposed by the hedge fund manager and no redemptions are currently permitted. This redemption restriction has been in place for six months and the time at which the redemption restriction might lapse is unknown.
    
4.  d
    
    This class invests in hedge funds that pursue multiple strategies to diversify risks and reduce volatility. The hedge funds' composite portfolio for this class includes investments in approximately 50 percent U.S. common stocks, 30 percent global real estate projects, and 20 percent arbitrage investments. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. Investments representing approximately 15 percent of the value of the investments in this class cannot be redeemed because the investments include restrictions that do not allow for redemption in the first year after acquisition. The remaining restriction period for these investments ranged from four to six months at December 31, 20X3.
    
5.  e
    
    This class includes several real estate funds that invest primarily in U.S. commercial real estate. The fair values of the investments in this class have been estimated using the net asset value of the Company's ownership interest in partners' capital. These investments can never be redeemed with the funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated. Twenty percent of the total investment in this class is planned to be sold within the next three years. However, the individual investments that will be sold have not yet been determined. Because it is not probable that any individual investment will be sold, the fair value of each individual investment has been estimated using the net asset value of the Company's ownership interest in partners' capital. Once it has been determined which investments will be sold and whether those investments will be sold individually or in a group, the investments will be sold in an auction process. The investee fund's management must approve of the buyer before the sale of the investments can be completed.
    
6.  f
    
    [Footnote superseded by Accounting Standards Update No. 2015-07](https://asc.understandingaccounting.org/updates/asu-2015-07/).