820-10-35-2C The effect on a fair value measurement of a restriction on the sale or use of an asset by a reporting entity
The effect on the measurement arising from a particular characteristic will differ depending on
howwhether the restriction
that characteristic would be
considered
taken into account by market
participants.participants in pricing the asset. Example 6 (see paragraph 820-10-55-51)
Paragraph 820-10-55-51 illustrates a restriction's effect on fair value measurement.
[Content amended as shown and moved from paragraph 82010-35-15]820-10-35-2D The asset or liability
measured at fair value might be either of the following: A standalone asset or liability (for example, a
{add glossary link}financial instrument
{add glossary link} or
an operating
a nonfinancial asset) A group of assets
and/or,
a group of liabilities, or a group of assets and liabilities (for example,
an asset group,
a reporting
unit,
unit or a business).
[Content amended as shown and moved from paragraph 820-10-35-21] 820-10-35-2E Whether the asset or liability is a standalone asset or
liability
liability, or a group of
assets and/or
assets, a group of liabilities, or a group of assets and liabilities
for recognition or disclosure purposes depends on its
unit of account. The unit of account for the asset or liability shall be determined in accordance with
the provisions of other accounting principles,
the Topic that requires or permits the fair value measurement, except as provided in
paragraph 820-10-35-44.
this Topic. [Content amended as shown and moved from paragraph 820-10-35-22] 9. Amend paragraph 820-10-35-3 and its related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > The Price
> > The Transaction 820-10-35-3 A fair value measurement assumes that the asset or liability is exchanged in an
{remove glossary link}orderly transaction{remove glossary link} between market participants to sell the asset or transfer the liability at the measurement date
under current market conditions.
The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.
[Content amended and moved to paragraph 820-10-356C] Therefore, the objective of a fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price).
[Content amended and moved to paragraph 820-10-05-1B] 10. Supersede paragraph 820-10-35-4, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-4 Paragraph superseded by Accounting Standards Update 2011-04. As discussed in paragraph 820-10-30-4, if the transaction price represents fair value at initial recognition and a pricing model will be used to measure fair value in subsequent periods, the model should be calibrated so that the model value at initial recognition equals the transaction price.
11. Amend paragraph 820-10-35-5 and supersede its related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > The Principal (or Most Advantageous) Market
820-10-35-5 A fair value measurement assumes that the transaction to sell the asset or transfer the liability
takes place either:
Occurs in
In the
principal market for the asset or liability In the absence of a principal market,
occurs
in the
most advantageous market for the asset or liability.
In either case, the principal (or most advantageous) market (and thus, market participants) should be considered from the perspective of the reporting entity, thereby allowing for differences between and among entities with different activities.
[Content amended and moved to paragraph 820-10-35-6A] 12. Add paragraph 820-10-35-5A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-5A A reporting entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which the reporting entity normally would enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or, in the absence of a principal market, the most advantageous market.13. Amend paragraph 820-10-35-6, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-6 If there is a principal market for the asset or liability, the fair value measurement shall represent the price in that market (whether that price is directly observable or
otherwise determined
estimated using
a
another valuation technique), even if the price in a different market is potentially more advantageous at the measurement date. 14. Add paragraphs 820-10-35-6A through 35-6C, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-6A The reporting entity must have access to the principal (or most advantageous) market at the measurement date. Because different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for different entities (and businesses within those entities). In either case,
Therefore, the principal (or most advantageous) market (and thus, market participants)
should
shall be considered from the perspective of the reporting entity, thereby allowing for differences between and among entities with different activities.
[Content amended as shown and moved from paragraph 820-10-35-5]820-10-35-6B Although a reporting entity must be able to access the market, the reporting entity does not need to be able to sell the particular asset or transfer the particular liability on the measurement date to be able to measure fair value on the basis of the price in that market. 820-10-35-6C The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date,
Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability.
[Content amended as shown and moved from paragraph 820-10-35-3] That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability. 15. Supersede paragraphs 820-10-35-7 through 35-8, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-7 Paragraph superseded by Accounting Standards Update 2011-04. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. Transaction costs shall be accounted for in accordance with the provisions of other Subtopics.
[Content amended and moved to paragraph 820-10-35-9B] 820-10-35-8 Paragraph superseded by Accounting Standards Update 2011-04. If location is an attribute of the asset or liability (as might be the case for a commodity), the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall be adjusted for the costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market.
[Content amended and moved to paragraph 820-10-35-9C] 16. Amend paragraph 820-10-35-9, with a link to transition paragraph 820-10-65-8, as follows:
> > Market Participants 820-10-35-9 A reporting entity shall measure The
the fair value of
the
an asset or
a liability
shall be determined based on
using the assumptions that market participants would use in pricing the asset or liability
, assuming that market participants act in their economic best interest. In developing those assumptions,
the
a reporting entity need not identify specific market participants. Rather, the reporting entity
should
shall identify characteristics that distinguish market participants generally, considering factors specific to all of the following: The asset or liability The principal (or most advantageous) market for the asset or liability Market participants with whom the reporting entity would
transact
enter into a transaction in that market. 17. Add paragraphs 820-10-35-9A through 35-9C and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > The Price820-10-35-9A Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (that is, an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. 820-10-35-9B The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for
transaction costs. Transaction costs shall be accounted for in accordance with
the provisions of
other
Subtopics
Topics.
[Content amended as shown and moved from paragraph 820-10-35-7] Transaction costs are not
an attribute
a characteristic of
the
an asset or
a liability; rather, they are specific to
the
a transaction and will differ depending on how
the
a reporting entity
transacts
enters into a transaction for the asset or liability.
[Content amended as shown and moved from Master Glossary]820-10-35-9C Transaction costs do not include transportation costs. If location is
an attribute
a characteristic of the asset
or liability
(as might be the case
, for example, for a commodity), the price in the principal (or most advantageous) market
used to measure the fair value of the asset or liability
shall be adjusted for the costs, if any, that would be incurred to transport the asset
from its current location to that or liability to (or from) its principal (or most advantageous)
market.
[Content amended as shown and moved from paragraph 820-10-35-8] 18. Supersede paragraph 820-10-35-10 and amend the heading preceding it, with a link to transition paragraph 820-10-65-8, as follows:
> > Application to Nonfinancial Assets 820-10-35-10 Paragraph superseded by Accounting Standards Update 2011-04. A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date.
[Content amended and moved to paragraph 820-10-35-10B] Highest and best use is determined based on the use of the asset by market participants, even if the intended use of the asset by the reporting entity is different.
[Content amended and moved to paragraph 820-10-35-10C] The highest and best use of the asset establishes the valuation premise used to measure the fair value of the asset, specifically:
In-use. The highest and best use of the asset is in-use if the asset would provide maximum value to market participants principally through its use in combination with other assets as a group (as installed or otherwise configured for use). [
Content amended and moved to paragraph 820-10-35-10E] For example, that might be the case for certain nonfinancial assets.
In-exchange. The highest and best use of the asset is in-exchange if the asset would provide maximum value to market participants principally on a standalone basis.
[Content amended and moved to paragraph 820-10-35-10E] For example, that might be the case for a financial asset.
19. Add paragraphs 820-10-35-10A through 35-10E and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Highest and Best Use for Nonfinancial Assets820-10-35-10A A fair value measurement of a nonfinancial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. 820-10-35-10B The highest and best use of a nonfinancial asset takes into account the useA fair value measurement assumes the highest and best use
of the asset
by market participants, considering the use of the asset
that is physically possible, legally permissible, and financially feasible, as follows:
at the measurement date.
[Content amended as shown and moved from paragraph 820-10-35-10] A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (for example, the location or size of a property). A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (for example, the zoning regulations applicable to a property). A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use. 820-10-35-10C Highest and best use is determined
from the perspective of based on the use of the asset by
market participants, even if
the intended use of the asset by
the reporting entity
is
intends a different
use.
[Content amended as shown and moved from paragraph 820-10-35-10] However, a reporting entity's current use of a nonfinancial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximize the value of the asset.820-10-35-10D To protect its competitive position, or for other reasons, a reporting entity may intend not to use an acquired nonfinancial asset actively, or it may intend not to use the asset according to its highest and best use. For example, that might be the case for an acquired intangible asset that the reporting entity plans to use defensively by preventing others from using it. Nevertheless, the reporting entity shall measure the fair value of a nonfinancial asset assuming its highest and best use by market participants. > > > Valuation Premise for Nonfinancial Assets820-10-35-10E The highest and best use of
the
a nonfinancial asset establishes the valuation premise used to measure the fair value of the asset,
as followsspecifically
: a.
In-use.
The highest and best use of
the
a nonfinancial asset
is in-use if the asset would
might provide maximum value to market participants
principally
through its use 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).
[Content amended as shown and moved from paragraph 820-10-35-10] 1. If the highest and best use of the asset is
in-use, the fair value of the asset shall be measured using an in-use valuation premise.
to use the asset in combination with other assets or with other assets and liabilities,When using an in-use valuation premise,
the fair value of the asset is
determined based on
the price that would be received in a current transaction to sell the asset assuming that the asset would be used with other assets
as a group
or with other assets and liabilities and that those assets
and liabilities (that is, its complementary assets and the associated liabilities) would be available to market participants.
[Content amended as shown and moved from paragraph 820-10-35-12]2.
Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the group of assets.
3. Generally, assumptions
Assumptions about the highest and best use of
the
a nonfinancial asset
should
shall be consistent for all of the assets
(for which highest and best use is relevant) of the group
of assets or the group of assets and liabilities within which
it
the asset would be used.
[Content amended as shown and moved from paragraph 820-10-35-12]b.
In-exchange
. The highest and best use of
the
a nonfinancial asset
is inexchange if the asset would
might provide maximum value to market participants
principally
on a standalone basis.
[Content amended as shown and moved from paragraph 820-10-35-10] If the highest and best use of the asset is
in exchange,
to use it on a standalone basis, the fair value of the asset shall be measured using an in-exchange valuation premise. When using an in-exchange valuation premise,
the fair value of the asset is
determined based on
the price that would be received in a current transaction to sell the asset
to market participants that would use the asset on a standalone
basis.
[Content amended as shown and moved from paragraph 820-10-35-13]20.
Supersede paragraph 820-10-35-11, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-11 Paragraph superseded by Accounting Standards Update 2011-04. Because the highest and best use of the asset is determined based on its use by market participants, the fair value measurement considers the assumptions that market participants would use in pricing the asset, whether using an in-use or an in-exchange valuation premise.
21. Add paragraph 820-10-35-11A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-11A The fair value measurement of a nonfinancial asset assumes that the asset is sold consistent with the unit of account specified in other Topics (which may be an individual asset). That is the case even when that fair value measurement assumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities because a fair value measurement assumes that the market participant already holds the complementary assets and associated liabilities. 22. Supersede paragraphs 820-10-35-12 through 35-13, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-12 Paragraph superseded by Accounting Standards Update 2011-04. If the highest and best use of the asset is in-use, the fair value of the asset shall be measured using an in-use valuation premise. When using an in-use valuation premise, the fair value of the asset is determined based on the price that would be received in a current transaction to sell the asset assuming that the asset would be used with other assets as a group and that those assets would be available to market participants.
[Content amended and moved to paragraph 820-10-35-10E(a)(1)] Generally, assumptions about the highest and best use of the asset should be consistent for all of the assets of the group within which it would be used.
[Content amended and moved to paragraph 820-10-35-10E(a)(3)]The fair value of an asset in-use is determined based on the use of the asset together with other assets as a group (consistent with its highest and best use from the perspective of market participants), even if the asset that is the subject of the measurement is aggregated (or disaggregated) at a different level for purposes of applying other guidance
.
820-10-35-13 Paragraph superseded by Accounting Standards Update 2011-04. If the highest and best use of the asset is in-exchange, the fair value of the asset shall be measured using an in-exchange valuation premise. When using an inexchange valuation premise, the fair value of the asset is determined based on the price that would be received in a current transaction to sell the asset standalone.
[Content amended and moved to paragraph 820-10-35-10E(b)]23. Amend paragraph 820-10-35-14, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-14 Example 1 (see paragraph 820-10-55-25)
Paragraph 820-10-55-25 illustrates the
application of the highest and best use and valuation premise
of highest and best use
concepts for nonfinancial assets. 24. Supersede paragraph 820-10-35-15, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-15 Paragraph superseded by Accounting Standards Update 2011-04. The effect on a fair value measurement of a restriction on the sale or use of an asset by a reporting entity will differ depending on whether the restriction would be considered by market participants in pricing the asset. Example 6 (see paragraph 820-10-55-51) illustrates a restriction's effect on fair value measurement.
[Content amended and moved to paragraph 820-10-35-2C] 820-10-35-15A Paragraph not used. 25. Amend paragraphs 820-10-35-16 through 35-16A, 820-10-35-16B, 820-10-35-16D, and related headings, add paragraphs 820-10-35-16AA and 820-10-35-16BB, and supersede paragraph 820-10-35-16C, with a link to transition paragraph 820-10-65-8, as follows:
> > Application to Liabilities and Instruments Classified in a Reporting Entity's Shareholders' Equity > > > General Principles820-10-35-16 A fair value measurement assumes
both of the following: The
that a financial or nonfinancial liability
or an instrument classified in a reporting entity's shareholders' equity (for example, equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date
(the liability to the counterparty continues; it is not settled)
.
The transfer of a liability or an instrument classified in a reporting entity's shareholders' equity assumes the following: [Content amended as shown and moved from paragraph 820-10-35-16(a)]Subparagraph superseded by Accounting Standards Update 2011-04. The liability is transferred to a market participant at the measurement date (the liability to the counterparty continues; it is not settled).
[Content amended and moved to paragraph 820-10-35-16] The nonperformance risk relating to that liability is the same before and after its transfer.
A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date. An instrument classified in a reporting entity's shareholders' equity would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished on the measurement date.820-10-35-16A A fair value measurement assumes that a liability is exchanged in an orderly transaction between market participants. However, liabilities are rarely transferred in the marketplace because of contractual or other legal restrictions preventing the transfer of liabilities. Some liabilities (for example, debt obligations), however, are traded in the marketplace as assets.
Even when there is no observable market to provide pricing information about the transfer of a liability or an instrument classified in a reporting entity's shareholders' equity (for example, because contractual or other legal restrictions prevent the transfer of such items), there might be an observable market for such items if they are held by other parties as assets (for example, a corporate bond or a call option on a reporting entity's shares). 820-10-35-16AA In all
instances, the
cases, a reporting entity shall maximize the use of relevant
{add glossary link}observable inputs
{add glossary link} and minimize the use of
{add glossary link}unobservable inputs
{add glossary link} to meet the objective of a fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability or instrument classified in shareholders' equity would take place between market participants at the measurement date under current market conditions.
[Content amended as shown and moved from paragraph 820-10-35-16C] > > > > Liabilities and Instruments Classified in a Reporting Entity's Shareholders' Equity Held by Other Parties as Assets820-10-35-16B If
When a quoted price
in an active market
for the
transfer of an identical
or a similar liability
or instrument classified in a reporting entity's shareholders' equity is
not available
, it represents a Level 1 measurement. In circumstances in which a quoted price in an active market for the identical liability is not available,
and the identical item is held by another party as an asset, a reporting entity shall measure
fair value using one or more of the following techniques:
the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date. a.
Subparagraph superseded by Accounting Standards Update 2011-04. A valuation technique that uses:
1. The quoted price of the identical liability when traded as an asset
2. Quoted prices for similar liabilities or similar liabilities when traded as assets.
b,
Subparagraph superseded by Accounting Standards Update 2011-04. Another valuation technique that is consistent with the principles of this Topic. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.
820-10-35-16BB In such cases, a reporting entity shall measure the fair value of the liability or equity instrument as follows:a. Using the quoted price in an active market for the identical item held by another party as an asset, if that price is availableb. If that price is not available, using other observable inputs, such as the quoted price in a market that is not active for the identical item held by another party as an asset c. If the observable prices in (a) and (b) are not available, using another valuation technique, such as: 1. An income approach (for example, a present value technique that takes into account the future cash flows that a market participant would expect to receive from holding the liability or equity instrument as an asset; see paragraph 820-10-55-3F)2. A market approach (for example, using quoted prices for similar liabilities or instruments classified in shareholders' equity held by other parties as assets; see paragraph 820-10-55-3A).820-10-35-16C Paragraph superseded by Accounting Standards Update 2011-04.
In all instances, the reporting entity shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
[Content amended and moved to paragraph 820-10-35-16AA]Furthermore, a reporting entity shall apply all applicable guidance in this Topic in determining fair value when the volume and level of activity for an asset or liability have significantly decreased and in identifying transactions that are not orderly.
820-10-35-16D When measuring the fair value of a liability using the quoted price of the liability when traded as an asset, the reporting entity shall not adjust the quoted price of the asset for the effect of a restriction preventing its sale. However,
A reporting entity shall adjust the quoted price of
the liability when traded
a liability or an instrument classified in a reporting entity's shareholders' equity held by another party as an asset
shall be adjusted for
only if there are factors specific to the asset that are not applicable to the fair value measurement of the liability
or equity instrument.
A reporting entity shall ensure that the price of the asset does not reflect the effect of a restriction preventing the sale of that asset. Some
circumstances in which a reporting entity shall consider whether
factors that may indicate that the quoted price of the asset should be adjusted include the following: The quoted price for the asset relates to a similar (but not identical) liability
traded as an asset.
or equity instrument held by another party as an asset. For example, the liability or equity instrument may have a particular characteristic (for example, the credit quality of the issuer) that is different from that reflected in the fair value of the similar liability or equity instrument held as an asset. The unit of account for the asset is not the same as for the liability
or equity instrument. (
for
For example,
for liabilities, in some cases the
quoted
price for
the
an asset
reflects a combined price for a package comprising both the amounts due from the issuer and includes the effect of
a third-party credit
enhancement
).
enhancement. If the unit of account for the liability is not for the combined package, the objective is to measure the fair value of the issuer's liability, not the fair value of the combined package. Thus, in such cases, the reporting entity would adjust the observed price for the asset to exclude the effect of the third -party credit enhancement. See paragraph 820-10-35-18A for further guidance. 26. Supersede paragraphs 820-10-35-16E through 35-16G, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-16E Paragraph superseded by Accounting Standards Update 2011-04.When estimating the fair value of a liability, a reporting entity shall not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability (see paragraphs 820-10-55-71 through 55-76). The effect of a restriction that prevents the transfer of a liability is either implicitly or explicitly already included in the other inputs to the fair value measurement.
[Content amended and moved to paragraph 820-10-35-18B] For example, at the transaction date, both the creditor and the obligor are willing to accept the transaction price for the liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of the restriction already being included in the transaction price, a separate input or adjustment to an existing input into the fair value measurement of a liability is not required at the transaction date to reflect the effect of the restriction on transfer. Additionally, a separate input or adjustment to other inputs into the fair value measurement of a liability is not required at subsequent measurement dates to reflect the effect of the restriction on transfer.
[Content amended and moved to paragraph 820-10-35-18C]820-10-35-16F Paragraph superseded by Accounting Standards Update 2011-04.In addition, there are two fundamental differences between the fair value measurement of an asset and a liability that justify different treatments for asset restrictions and for liability restrictions. First, restrictions on the transfer of a liability relate to performance under the obligation (that is, the reporting entity is legally obligated to satisfy the obligation and needs to do something to be relieved of the obligation), whereas restrictions on the transfer of an asset relate to the marketability of the asset. Second, virtually all liabilities include a restriction preventing the transfer of the liability, whereas most assets do not include a similar restriction. As a result, the effect of a restriction preventing the transfer of a liability would, theoretically, be consistent for all liabilities. However, the inclusion of a restriction preventing the sale of the asset typically results in a lower fair value for the restricted asset versus the nonrestricted asset, all other factors being equal.
820-10-35-16G Paragraph superseded by Accounting Standards Update 2011-04.When measuring the fair value of a liability using a valuation technique, a reporting entity shall ensure that the fair value measurement is consistent with the principles of this Topic, that is, the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. For example, when using a technique based on the amount at the measurement date that the reporting entity would receive to enter into the identical liability (see paragraph 820-10-35-16B), the inputs shall reflect the assumptions that market participants would use (or the reporting entity's own assumption about the assumptions that market participants would use) in the principal or most advantageous market for issuance of a liability with the same contractual terms.
[Content amended and moved to paragraph 820-10-35-16I(b)] 27. Add paragraphs 820-10-35-16H through 35-16L and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > > > Liabilities and Instruments Classified in a Reporting Entity's Shareholders' Equity Not Held by Other Parties as Assets820-10-35-16H When a quoted price for the transfer of an identical or a similar liability or instrument classified in a reporting entity's shareholders' equity is not available and the identical item is not held by another party as an asset, a reporting entity shall measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.820-10-35-16I For example, when applying a present value technique, a reporting entity might take into account either of the following:The future cash outflows that a market participant would expect to incur in fulfilling the obligation, including the compensation that a market participant would require for taking on the obligation (see paragraphs 820-10-35-16J through 35-16K).For example, when using a technique based on the amount at the measurement date that the reporting entity would receive to enter into the identical liability (see paragraph 820-10-35-16B), the inputs shall reflect the assumptions that
The amount that a market
participants
participant would
use (or the reporting entity's own assumption about the assumptions that market participants would use)
receive to enter into or issue an identical liability or equity instrument, using the assumptions that market participants would use when pricing the identical item (for example, having the same credit characteristics) in the principal
or most advantageous market for issuance of
(or most advantageous) market for issuing a liability
or an equity instrument with the same contractual terms.
[Content amended as shown and moved from paragraph 820-10-35-16G]820-10-35-16J When using a present value technique to measure the fair value of a liability that is not held by another party as an asset (for example, an asset retirement obligation), a reporting entity shall, among other things, estimate the future cash outflows that market participants would expect to incur in fulfilling the obligation. Those future cash outflows shall include market participants' expectations about the costs of fulfilling the obligation and the compensation that a market participant would require for taking on the obligation. Such compensation includes the return that a market participant would require for the following: Undertaking the activity (that is, the value of fulfilling the obligation—for example, by using resources that could be used for other activities) Assuming the risk associated with the obligation (that is, a risk premium that reflects the risk that the actual cash outflows might differ from the expected cash outflows; see paragraph 820-10-35-16L). 820-10-35-16K For example, a nonfinancial liability does not contain a contractual rate of return and there is no observable market yield for that liability. In some cases, the components of the return that market participants would require will be indistinguishable from one another (for example, when using the price a third-party contractor would charge on a fixed-fee basis). In other cases, a reporting entity needs to estimate those components separately (for example, when using the price a third-party contractor would charge on a cost-plus basis because the contractor in that case would not bear the risk of future changes in costs).820-10-35-16L A reporting entity can include a risk premium in the fair value measurement of a liability or an instrument classified in a reporting entity's shareholders' equity that is not held by another party as an asset in one of the following ways:By adjusting the cash flows (that is, as an increase in the amount of cash outflows) By adjusting the rate used to discount the future cash flows to their present values (that is, as a reduction in the discount rate).A reporting entity shall ensure that it does not double count or omit adjustments for risk. For example, if the estimated cash flows are increased to take into account the compensation for assuming the risk associated with the obligation,the discount rate should not be adjusted to reflect that risk.28. Amend paragraphs 820-10-35-17 through 35-18A, add a related heading, and supersede a related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > > Nonperformance Risk820-10-35-17 The fair value of
the
a liability
shall reflect the nonperformance risk relating to that liability.
reflects the effect of nonperformance risk. Nonperformance risk includes, but may not be limited to, a reporting entity's own credit risk. Nonperformance risk is assumed to be the same before and after the transfer of the liability. 820-10-35-18 When measuring the fair value of a liability, aThe
reporting entity shall
consider
take into account the effect of its credit risk (credit standing)
and any other factors that might influence the likelihood that the obligation will or will not be fulfilled.on the fair value of the liability in all periods in which the liability is measured at fair value.
That effect may differ depending on the liability, for example: Whether the liability is an obligation to deliver cash (a financial liability) or an obligation to deliver goods or services (a nonfinancial liability) The terms of credit enhancements related to the liability, if any.
Example 7 (see paragraph 820-10-55-56
)
Paragraph 820-10-55-56 illustrates the effect of credit risk on
the fair value measurement of a liability.
> > > Liability Issued with an Inseparable Third-Party Credit Enhancement
820-10-35-18A The fair value of a liability reflects the effect of nonperformance risk on the basis of its unit of account. In accordance with Topic 825, The
the issuer of a
{add glossary link}liabilityissued with an inseparable third-party credit enhancement{add glossary link} that is accounted for separately from the liabilitywith the characteristics set forth in paragraph 820-10-25-1
shall not include the effect of the credit enhancement
(for example, a third-party guarantee of debt) in the fair value measurement of the liability.
For the issuer, the unit of accounting for a liability measured or disclosed at fair value does not include the third-party credit enhancement. This paragraph does not apply to the holder of the issuer's credit-enhanced liability.
[Content amended and moved to paragraph 825-10-25-13] For example, in determining the fair value of debt with a third-party guarantee,
If the credit enhancement is accounted for separately from the liability, the issuer would
consider
take into account its own credit standing and not that of the third-party guarantor
when measuring the fair value of the liability.
[Content amended as shown and moved from paragraph 820-10-55-23D] 29. Add paragraphs 820-10-35-18B through 35-18L and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Restriction Preventing the Transfer of a Liability or an Instrument Classified in a Reporting Entity's Shareholders' Equity820-10-35-18B When
estimating
measuring the fair value of a liability
or an instrument classified in a reporting entity's shareholders' equity, a reporting entity shall not include a separate input or
an adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the
item.liability (see paragraphs 820-10-55-71 through 55-76).
The effect of a restriction that prevents the transfer of a liability
or an instrument classified in a reporting entity's shareholders' equity is either implicitly or explicitly
already
included in the other inputs to the fair value measurement.
[Content amended as shown and moved from paragraph 820-10-35-16E] 820-10-35-18C For example, at the transaction date, both the creditor and the obligor
are willing to accept
accepted the transaction price for the liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of the restriction
already
being included in the transaction price, a separate input or
an adjustment to an existing input
into the fair value measurement of a liability
is not required at the transaction date to reflect the effect of the restriction on transfer.
Additionally
Similarly, a separate input or
an adjustment to
other inputs into the fair value measurement of a liability
an existing input is not required at subsequent measurement dates to reflect the effect of the restriction on transfer.
[Content amended as shown and moved from paragraph 820-10-35-16E] > > Application to Financial Assets and Financial Liabilities with Offsetting Positions in Market Risks or Counterparty Credit Risk820-10-35-18D A reporting entity that holds a group of financial assets and financial liabilities is exposed to market risks (that is, interest rate risk, currency risk, or other price risk) and to the credit risk of each of the counterparties. If the reporting entity manages that group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the reporting entity is permitted to apply an exception to this Topic for measuring fair value. That exception permits a reporting entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (that is, an asset) for a particular risk exposure or to transfer a net short position (that is, a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. Accordingly, a reporting entity shall measure the fair value of the group of financial assets and financial liabilities consistently with how market participants would price the net risk exposure at the measurement date.820-10-35-18E A reporting entity is permitted to use the exception in the preceding paragraph only if the reporting entity does all of the following: Manages the group of financial assets and financial liabilities on the basis of the reporting entity's net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the reporting entity's documented risk management or investment strategyProvides information on that basis about the group of financial assets and financial liabilities to the reporting entity's managementIs required or has elected to measure those financial assets and financial liabilities at fair value in the statement of financial position at the end of each reporting period.820-10-35-18F The exception in paragraph 820-10-35-18D does not pertain to financial statement presentation. In some cases, the basis for the presentation of financial instruments in the statement of financial position differs from the basis for the measurement of financial instruments, for example, if a Topic does not require or permit financial instruments to be presented on a net basis. In such cases, a reporting entity may need to allocate the portfolio-level adjustments (see paragraphs 820-10-35-18I through 35-18L) to the individual assets or liabilities that make up the group of financial assets and financial liabilities managed on the basis of the reporting entity's net risk exposure. A reporting entity shall perform such allocations on a reasonable and consistent basis using a methodology appropriate in the circumstances. 820-10-35-18G A reporting entity shall make an accounting policy decision to use the exception in paragraph 820-10-35-18D. A reporting entity that uses the exception shall apply that accounting policy, including its policy for allocating bidask adjustments (see paragraphs 820-10-35-18I through 35-18K) and credit adjustments (see paragraph 820-10-35-18L), if applicable, consistently from period to period for a particular portfolio. 820-10-35-18H The exception in paragraph 820-10-35-18D applies only to financial assets and financial liabilities within the scope of Topic 815 or Topic 825. > > > Exposure to Market Risks820-10-35-18I When using the exception in paragraph 820-10-35-18D to measure the fair value of a group of financial assets and financial liabilities managed on the basis of the reporting entity's net exposure to a particular market risk (or risks), the reporting entity shall apply the price within the bid-ask spread that is most representative of fair value in the circumstances to the reporting entity's net exposure to those market risks (see paragraphs 820-10-35-36C through 35-36D). 820-10-35-18J When using the exception in paragraph 820-10-35-18D, a reporting entity shall ensure that the market risk (or risks) to which the reporting entity is exposed within that group of financial assets and financial liabilities is substantially the same. For example, a reporting entity would not combine the interest rate risk associated with a financial asset with the commodity price risk associated with a financial liability, because doing so would not mitigate the reporting entity's exposure to interest rate risk or commodity price risk. When using the exception in paragraph 820-10-35-18D, any basis risk resulting from the market risk parameters not being identical shall be taken into account in the fair value measurement of the financial assets and financial liabilities within the group. 820-10-35-18K Similarly, the duration of the reporting entity's exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities shall be substantially the same. For example, a reporting entity that uses a 12-month futures contract against the cash flows associated with 12 months' worth of interest rate risk exposure on a 5-year financial instrument within a group made up of only those financial assets and financial liabilities measures the fair value of the exposure to 12-month interest rate risk on a net basis and the remaining interest rate risk exposure (that is, years 2 through 5) on a gross basis. > > > Exposure to the Credit Risk of a Particular Counterparty820-10-35-18L When using the exception in paragraph 820-10-35-18D to measure the fair value of a group of financial assets and financial liabilities
entered into with a particular counterparty, the reporting entity shall include the effect of the reporting entity's net exposure to the credit risk of that counterparty or the counterparty's net exposure to the credit risk of the reporting entity in the fair value measurement when market participants would take into account any existing arrangements that mitigate credit risk exposure in the event of default (for example, a master netting agreement with the counterparty or an agreement that requires the exchange of collateral on the basis of each party's net exposure to the credit risk of the other party). The fair value measurement shall reflect market participants' expectations about the likelihood that such an arrangement would be legally enforceable in the event of default. 30. Supersede paragraphs 820-10-35-19 through 35-23 and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > The Asset or Liability
820-10-35-19 Paragraph superseded by Accounting Standards Update 2011-04. A fair value measurement is for a particular asset or liability. Therefore, the measurement should consider attributes specific to the asset or liability, for example:
The condition and/or location of the asset or liability
Restrictions, if any, on the sale or use of the asset at the measurement date
.
[Content amended and moved to paragraph 820-10-35-2B]820-10-35-20 Paragraph superseded by Accounting Standards Update 2011-04. The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. However, the definition of fair value also shall be applied to instruments measured at fair value that are classified in stockholders' equity.
[Content amended and moved to paragraph 820-10-051D] 820-10-35-21 Paragraph superseded by Accounting Standards Update 2011-04. The asset or liability might be either of the following:
A standalone asset or liability (for example, a financial instrument or an operating asset)
A group of assets and/or liabilities (for example, an asset group, a reporting unit, or a business).
[Content amended and moved to paragraph 820-10-35-2D] 820-10-35-22 Paragraph superseded by Accounting Standards Update 2011-04. Whether the asset or liability is a standalone asset or liability or a group of assets and/or liabilities depends on its unit of account. The unit of account for the asset or liability shall be determined in accordance with the provisions of other accounting principles, except as provided in paragraph 820-10-35-44.
[Content amended and moved to paragraph 820-10-35-2E] 820-10-35-23 Paragraph superseded by Accounting Standards Update 2011-04. Example 6 (see paragraph 820-10-55-51) illustrates a restriction's effect on fair value measurement.
31. Amend paragraph 820-10-35-24, with a link to transition paragraph 820-10-65-8, as follows:
> Valuation Techniques 820-10-35-24 A reporting entity shall use valuationValuation
techniques that are appropriate in the circumstances and for which sufficient data are available
shall be used
to measure fair value
, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate (for example, as might be the case when valuing a reporting unit). If multiple valuation techniques are used to measure fair value, the results (respective indications of fair value) shall be evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances. Example 3 (see paragraph 820-10-55-35) illustrates the use of multiple valuation techniques.
[Content amended and moved to paragraph 820-10-35-24B] 32. Add paragraphs 820-10-35-24A through 35-24C, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-24A The objective of using a valuation technique 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. Three widely used valuationValuation
techniques
consistent with
are the
market approach,
cost approach, and income approach
,
approach. and/or cost approach shall be used to measure fair value.
The definitions and key
main aspects of those approaches
follow
are summarized in paragraphs 820-10-55-3A through 55-3G.
An entity shall use valuation techniques consistent with one or more of those approaches to measure fair value. [Content amended as shown and moved from paragraph 820-10-35-28]820-10-35-24B In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or
a liability using quoted prices in an
active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate (for example,
as
that might be the case when valuing a reporting unit). If multiple valuation techniques are used to measure fair value, the results (
that is, respective indications of fair value) shall be evaluated
and weighted, as appropriate,
considering the reasonableness of the range
of values indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
Example 3 (see paragraph 820-10-55-35)
Paragraph 820-10-55-35 illustrates the use of multiple valuation techniques.
[Content amended as shown and moved from paragraph 820-10-35-24] 820-10-35-24C If the transaction price
represents
is fair value at initial recognition and a
pricing model
valuation technique that uses unobservable inputs will be used to measure fair value in subsequent periods, the
model
valuation technique shall be calibrated so that
the model value
at initial recognition
the result of the valuation technique equals the transaction price.
[Content amended as shown and moved from paragraph 820-10-30-4] Calibration ensures that the valuation technique reflects current market conditions, and it helps a reporting entity to determine whether an adjustment to the valuation technique is necessary (for example, there might be a characteristic of the asset or liability that is not captured by the valuation technique). After initial recognition, when measuring fair value using a valuation technique or techniques that use unobservable inputs, a reporting entity shall ensure that those valuation techniques reflect observable market data (for example, the price for a similar asset or liability) at the measurement date. 33. Amend paragraphs 820-10-35-25 through 35-27, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-25 Valuation techniques used to measure fair value shall be
consistently
applied
consistently. However, a change in a valuation technique or its application (for example, a change in its weighting when multiple valuation techniques are used
or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example,
if
any of the following events
occur:
take place: New markets develop. New information becomes available. Information previously used is no longer available. Valuation techniques improve.
Market conditions change. 820-10-35-26 Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate. (See paragraph 250-10-45-17.
Also
However, paragraph 250-10-50-5 explains that the
disclosure provisions of
disclosures in Topic 250 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its application.)
820-10-35-27 The Examples in Section 820-10-55 illustrate
, in qualitative terms,
the judgments
that might apply when a reporting entity
that
measures assets
and/or
and liabilities at fair value
might apply in varying
in different valuation situations. 34. Supersede paragraphs 820-10-35-28 through 35-35 and related headings, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-28 Paragraph superseded by Accounting Standards Update 2011-04. Valuation techniques consistent with the market approach, income approach, and/or cost approach shall be used to measure fair value. The definitions and key aspects of those approaches follow.
[Content amended and moved to paragraph 820-10-35-24A]> > Market Approach
820-10-35-29 Paragraph superseded by Accounting Standards Update 2011-04.The market approach is defined in this Subtopic as a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business).
[Content amended and moved to paragraph 820-10-55-3A]820-10-35-30 Paragraph superseded by Accounting Standards Update 2011-04.For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative).
[Content amended and moved to paragraph 820-10-55-3B]820-10-35-31 Paragraph superseded by Accounting Standards Update 2011-04.Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities.
[Content amended and moved to paragraph 820-10-55-3C] > > Income Approach
820-10-35-32 Paragraph superseded by Accounting Standards Update 2011-04.The income approach is defined in this Subtopic as an approach that uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts.
[Content amended and moved to paragraph 820-10-55-3F]820-10-35-33 Paragraph superseded by Accounting Standards Update 2011-04.Those valuation techniques include the following:
Present value techniques
Option-pricing models (which incorporate present value techniques), such as the Black-Scholes-Merton formula (a closed-form model) and a binomial model (a lattice model)
The multiperiod excess earnings method, which is used to measure the fair value of certain intangible assets.
[Content amended and moved to paragraph 820-10-55-3G]> > Cost Approach
820-10-35-34 Paragraph superseded by Accounting Standards Update 2011-04.The cost approach is defined in this Subtopic as a valuation technique based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).
[Content amended and moved to paragraph 820-10-55-3D]820-10-35-35 Paragraph superseded by Accounting Standards Update 2011-04.From the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
[Content amended and moved to paragraph 820-10-55-3E]35. Amend paragraph 820-10-35-36 and add related heading, with a link to transition paragraph 820-10-65-8, as follows:
> Inputs to Valuation Techniques > > General Principles820-10-35-36 Valuation techniques used to measure fair value shall maximize the use of relevant
{remove glossary link}observable inputs{remove glossary link} (that is, Level 1 and Level 2 inputs that do not require significant adjustment)
and minimize the use of
{remove glossary link}unobservable inputs{remove glossary link}.
Examples of markets in which inputs might be observable for some assets and liabilities (for example, financial instruments) include exchange markets, dealer markets, brokered markets, and principal to-principal markets.
[Content moved to paragraph 820-10-35-36A] 36. Add paragraphs 820-10-35-36A through 35-36D and related heading, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-36A Examples of markets in which inputs might be observable for some assets and liabilities (for example, financial instruments) include
exchange markets,
dealer markets,
brokered markets, and
principal-to-principal markets.
[Content moved from paragraph 820-10-35-36] 820-10-35-36B A reporting entity shall select inputs that are consistent with the characteristics of the asset or liability that market participants would take into account in a transaction for the asset or liability (see paragraphs 820-10-35-2B through 35-2C). In some cases, those characteristics result in the application of an adjustment, such as a premium or discount (for example, a control premium or noncontrolling interest discount). However, a fair value measurement shall not incorporate a premium or discount that is inconsistent with the unit of account in the Topic that requires or permits the fair value measurement. Premiums or discounts that reflect size as a characteristic of the reporting entity's holding (specifically, a blockage factor that adjusts the quoted price of an asset or a
liability because the market's normal daily trading volume is not sufficient to absorb the quantity held by the entity, as described in paragraph 820-10-35-44) rather than as a characteristic of the asset or liability (for example, a control premium when measuring the fair value of a controlling interest) are not permitted in a fair value measurement. In all cases, if there is a quoted price in an active market (that is, a Level 1 input) for an asset or a liability, a reporting entity shall use that quoted price without adjustment when measuring fair value, except as specified in paragraph 820-10-35-41C.> > Inputs Based on Bid and Ask Prices820-10-35-36C If an
asset or a liability measured at input used to measure
fair value
is based on bid and ask prices
has a bid price and an ask price (for example,
in
an input from a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair
value,
value regardless of where
in the fair value hierarchy
the input
falls (
is categorized within the fair value hierarchy (that is, Level 1, 2, or 3). The use of bid prices for
long
asset positions
(assets)
and ask prices for
short
liability positions
(liabilities)
is permitted but
is not required.
[Content amended as shown and moved from paragraph 820-10-35-56] 820-10-35-36D This
Subtopic
Topic does not preclude the use of mid-market pricing or other pricing conventions
that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread.
Bid-ask spread pricing methods appropriate under Securities and Exchange Commission (SEC) Accounting Series Release No. 118, Accounting for Investment Securities by Registered Investment Companies, are appropriate under this Subtopic.
[Content amended as shown and moved from paragraph 820-10-35-57] 37. Amend paragraph 820-10-35-37, with a link to transition paragraph 820-10-65-8, as follows:
> Fair Value Hierarchy 820-10-35-37 To increase consistency and comparability in fair value measurements and related disclosures,
this Topic establishes athe
fair value hierarchy
that prioritizes
categorizes into three levels (see paragraphs 820-10-35-40 through 35-41, 820-10-35-41B through 35-41C, 820-10-35-44, 820-10-35-46 through 35-51, and 820-10-35-52 through 35-54A) the inputs to valuation techniques used to measure fair value
into three broad levels
. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (
{add glossary link}Level 1
inputs{add glossary link}) and the lowest priority to unobservable inputs (
{add glossary link}Level 3
inputs{add glossary link}).
In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.
[Content amended and moved to paragraph 820-10-35-37A]38. Add paragraph 820-10-35-37A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-37A In some cases, the inputs used to measure
the fair value
of an asset or a liability might
fall in
be categorized within different levels of the fair value hierarchy.
In those cases, the The level in the fair value hierarchy within which the
fair value measurement
is categorized in its entirety
falls shall be determined based on
in the same level of the fair value hierarchy as the lowest level input that is significant to the
entire measurementfair value measurement in its entirety
. Assessing the significance of a particular input to the
entire measurementfair value measurement in its entirety
requires judgment,
considering
taking into account factors specific to the asset or liability.
Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorized. [Content amended as shown and moved from paragraph 820-10-35-37] 39. Amend paragraph 820-10-35-38, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-38 The availability of
relevant inputs
relevant to the asset or liability
and
the
their relative
subjectivityreliability of the inputs
might affect the selection of appropriate valuation techniques
(see paragraph 820-10-35-24). However, the fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation
techniques.
techniques used to measure fair value. For example, a fair value measurement
developed using a present value technique might
fall
be categorized within Level 2 or Level 3, depending on the inputs that are significant to the
entire measurement
in its entirety
and the level
in
of the fair value hierarchy within which those inputs
fall
are categorized. 40. Add paragraph 820-10-35-38A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-38A If an observable input requires an adjustment using an unobservable input and that adjustment results in a significantly higher or lower fair value measurement, the resulting measurement would be categorized within Level 3 of the fair value hierarchy. For example, if a market participant would take into account the effect of a restriction on the sale of an asset when estimating the price for the asset, a reporting entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable input that is significant to the entire measurement, the measurement would be categorized within Level 3 of the fair value hierarchy. 41. Supersede paragraph 820-10-35-39, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-39 Paragraph superseded by Accounting Standards Update 2011-04.The remainder of this guidance is organized as follows:
Level 1 inputs
Level 2 inputs
Level 3 inputs
Inputs based on bid and ask prices
Investments in certain entities that calculate net asset value per share (or its equivalent, for example, member units or an ownership interest in partners' capital to which a proportionate share of net assets is attributed).
42. Amend paragraphs 820-10-35-40 through 35-41, with a link to transition paragraph 820-10-65-8, as follows:
> > Level 1 Inputs820-10-35-40 Level 1 inputs are
defined in this Subtopic as
quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
has the ability to
can access at the measurement date.
820-10-35-41 A quoted price in an active market provides the most reliable evidence of fair value and shall be used
without adjustment to measure fair value whenever available, except as specified in paragraph 820-10-35-41C.
discussed in paragraphs 820-10-35-16D, 820-10-35-42, and 820-10-35-43.
43. Supersede paragraph 820-10-35-41A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-41A Paragraph superseded by Accounting Standards Update 2011-04.A Level 1 fair value measurement for the liability is a quoted price in an active market for the identical liability at the measurement date. In addition, the quoted price for the identical liability when traded as an asset in an active market also is a Level 1 fair value measurement for that liability when no adjustments to the quoted price of the asset are required. However, a reporting entity needs to determine whether the quoted price for the identical liability when traded as an asset in an active market should be adjusted for factors specific to the liability and the asset (see paragraph 820-10-35-16D). Any adjustment to the quoted price of the asset shall render the fair value measurement of the liability a lower level measurement.
[Content amended and moved to paragraph 820-10-35-41C(c)] 44. Add paragraphs 820-10-35-41B through 35-41C, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-41B A Level 1 input will be available for many financial assets and
financial liabilities, some of which might be exchanged in multiple active markets (for example, on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following: The principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability
, considered from the perspective of the reporting entity
Whether the reporting entity
can enter into a transaction has the ability to access
for the asset or liability at the price in that market
for the asset or liability
at the measurement date.
[Content amended as shown and moved from paragraph 820-10-35-45] 820-10-35-41C A reporting entity shall not make an adjustment to a Level 1 input except in the following circumstances:a. If the
When a reporting entity holds a large number of similar
(but not identical) assets or liabilities (for example, debt securities) that are
required to be
measured at fair
value,
value and a quoted price in an active market
might be
is available but not readily accessible for each of those assets or liabilities individually
(that is, given the large number of similar assets or liabilities held by the reporting entity, it would be difficult to obtain pricing information for each individual asset or liability at the measurement date). In that case,
as a practical expedient, a reporting entity may measure fair value
may be measured
using an alternative pricing method that does not rely exclusively on quoted prices (for example, matrix pricing)
as a practical expedient
. However, the use of an alternative pricing method
renders the fair value measurement a lower-level measurement
results in a fair value measurement categorized within a lower level of the fair value hierarchy.
[Content amended as shown and moved from paragraph 820-10-35-42] b. In some situations,
When a quoted price in an active market
might
does not represent fair value at the measurement date. That might be the case if, for example, significant events (
such as transactions in a principal-to-principal
transactions,
market, trades in a brokered
trades,
market, or announcements)
occur
take place after the close of a market but before the measurement date.
The
A reporting entity
should
shall establish and consistently apply a policy for identifying those events that might affect fair value measurements. However, if the quoted price is adjusted for new information, the adjustment
renders the fair value measurement a lower-level measurement
results in a fair value measurement categorized within a lower level of the fair value hierarchy. [Content amended as shown and moved from paragraph 820-10-35-43] c. A Level 1 fair value measurement for the liability is a quoted price in an active market for the identical liability at the measurement date. In addition,
When measuring the fair value of a liability or an instrument classified in a reporting entity's shareholders' equity using the quoted price for the identical
liability
item when
traded as an asset in an active
market also is a
market and that price needs to be adjusted for factors specific to the item or the asset (see paragraph 820-10-35-16D). If no adjustment to the quoted price of the asset is required, the result is a fair value measurement categorized within Level 1
of the fair value
hierarchy.measurement for that liability when no adjustments to the quoted price of the asset are required. However, a reporting entity needs to determine whether the quoted price for the identical liability when traded as an asset in an active market should be adjusted for factors specific to the liability and the asset (see paragraph 820-10-35-16D). Any
However, any adjustment to the quoted price of the asset
shall render the fair value measurement of the liability a
results in a fair value measurement categorized within a lower level
of the fair value hierarchymeasurement
.
[Content amended as shown and moved from paragraph 820-10-35-41A]45. Supersede paragraphs 820-10-35-42 through 35-43, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-42 Paragraph superseded by Accounting Standards Update 2011-04. If the reporting entity holds a large number of similar assets or liabilities (for example, debt securities) that are required to be measured at fair value, a quoted price in an active market might be available but not readily accessible for each of those assets or liabilities individually. In that case, fair value may be measured using an alternative pricing method that does not rely exclusively on quoted prices (for example, matrix pricing) as a practical expedient. However, the use of an alternative pricing method renders the fair value measurement a lower-level measurement.
[Content amended and moved to paragraph 820-10-35-41C]820-10-35-43 Paragraph superseded by Accounting Standards Update 2011-04. In some situations, a quoted price in an active market might not represent fair value at the measurement date. That might be the case if, for example, significant events (principal-to-principal transactions, brokered trades, or announcements) occur after the close of a market but before the measurement date. The reporting entity should establish and consistently apply a policy for identifying those events that might affect fair value measurements. However, if the quoted price is adjusted for new information, the adjustment renders the fair value measurement a lower-level measurement.
[Content amended and moved to paragraph 820-10-35-41C] 46. Amend paragraph 820-10-35-44, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-44 If
the
a reporting entity holds a position in a single
financial instrument
asset or liability (including
a block
a position comprising a large number of identical assets or liabilities, such as a holding of financial instruments) and the
instrument
asset or liability is traded in an active market, the fair value of the
position
asset or liability shall be measured within Level 1 as the product of the quoted price for the individual
instrument and
asset or liability and the quantity held.
held by the reporting entity. The quoted price shall not be adjusted because of the size of the position relative to trading volume (blockage factor). The use of a blockage factor is prohibited,
That is the case, even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. 47. Supersede paragraph 820-10-35-45, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-45 Paragraph superseded by Accounting Standards Update 2011-04. A Level 1 input will be available for many financial assets and liabilities, some of which might be exchanged in multiple active markets (for example, on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following:
The principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability, considered from the perspective of the reporting entity
Whether the reporting entity has the ability to access the price in that market for the asset or liability at the measurement date.
[Content amended and moved to paragraph 820-10-35-41B] 48. Amend paragraphs 820-10-35-46 through 35-48, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-46 Example 4 (see paragraph 820-10-55-42)
Paragraph 820-10-55-42 illustrates the use of Level 1 inputs to measure the fair value of a financial asset that trades in multiple active markets with different prices.
> > Level 2 Inputs 820-10-35-47 {add glossary link}Level 2 inputs
{add glossary link} are
defined in this Subtopic as
inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
820-10-35-48 If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include
all of
the following: a. Quoted prices for similar assets or liabilities in active markets b. Quoted prices for identical or similar assets or liabilities in markets that are not active c. Inputs other than quoted prices that are observable for the asset or liability, for example: Interest rates and yield curves observable at commonly quoted intervals
Volatilities
Implied volatilities Subparagraph superseded by Accounting Standards Update 2011-04.Prepayment speeds
Subparagraph superseded by Accounting Standards Update 2011-04.Loss severities
Credit
risks
spreads. Subparagraph superseded by Accounting Standards Update 2011-04.Default rates.
d.
Market-corroborated inputs.
The guidance beginning in paragraph 820-10-35-51A includes example factors that may indicate a market is not active or that there has been a significant decrease in the volume and level of activity for the asset or liability when compared to normal market activity for the asset or liability (or similar assets or liabilities), depending on the degree to which the factors exist.
820-10-35-49 Paragraph 820-10-55-21 discusses Level 2 inputs for particular assets and liabilities. 49. Amend paragraphs 820-10-35-50 through 35-51, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-50 Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability. Those factors include the following: The condition
and/or
or location of the asset
or liability
The extent to which
the
inputs relate to items that are comparable to the asset or
liability, including
liability (including those factors
discussed
described in paragraph
820-10-35-16D
820-10-35-16D) The volume
and
or level of activity in the markets within which the inputs are observed.
820-10-35-51 An adjustment
to a Level 2 input that is significant to the
fair value
entire measurement
in its entirety might render the measurement a Level 3
might result in a fair value measurement
categorized within Level 3 of the fair value hierarchy,
depending on
if the adjustment uses significant unobservable inputs.the level in the fair value hierarchy within which the inputs used to determine the adjustment fall.
50. Supersede paragraphs 820-10-35-51A through 35-51H and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
820-10-35-51A Paragraph superseded by Accounting Standards Update 2011-04.To determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability (or similar assets or liabilities),factors the reporting entity shall evaluate include, but are not limited to, all of the following:
There are few recent transactions.
Price quotations are not based on current information.
Price quotations vary substantially either over time or among market makers (for example, some brokered markets).
Indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability.
There is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the reporting entity's estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability.
There is a wide bid-ask spread or significant increase in the bid-ask spread.
There is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities.
Little information is released publicly (for example, a principal-toprincipal market).
The reporting entity shall evaluate the significance and relevance of the factors to determine whether, based on the weight of the evidence, there has been a significant decrease in the volume and level of activity for the asset or liability.
[Content amended and moved to paragraph 820-10-35-54C] 820-10-35-51B Paragraph superseded by Accounting Standards Update 2011-04.If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly). Further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with this Subtopic. Significant adjustments also may be necessary in other circumstances (for example, if a price for a similar asset requires significant adjustment to make it more comparable to the asset being measured or when the price is stale).
[Content amended and moved to paragraph 820-10-35-54D]820-10-35-51C Paragraph superseded by Accounting Standards Update 2011-04.
This Subtopic does not prescribe a methodology for making significant adjustments to transactions or quoted prices when estimating fair value. The guidance beginning in paragraph 820-10-35-24 discusses the use of valuation techniques in estimating fair value.
[Content amended and moved to paragraph 820-10-35-54E] If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate (for example, the use of a market approach and a present value technique). When weighting indications of fair value resulting from the use of multiple valuation techniques, the reporting entity shall consider the reasonableness of the range of fair value estimates. The objective is to determine the point within that range that is most representative of fair value under current market conditions. A wide range of fair value estimates may be an indication that further analysis is needed.
[Content amended and moved to paragraph 820-10-35-54F] 820-10-35-51D Paragraph superseded by Accounting Standards Update 2011-04.Even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used,liability, the objective of a fair value measurement remains the same. The glossary defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
[Content amended and moved to paragraph 820-10-35-54G] Determining the price at which willing market participants would transact at the measurement date under current market conditions if there has been a significant decrease in the volume and level of activity for the asset or liability depends on the facts and circumstances and requires the use of significant judgment. However, the reporting entity's intention to hold the asset or liability is not relevant in estimating fair value. Fair value is a market-based measurement, not an entity-specific measurement.
[Content amended and moved to paragraph 820-10-35-54H] > > > Identifying Transactions That Are Not Orderly
820-10-35-51E Paragraph superseded by Accounting Standards Update 2011-04.Even if there has been a significant decrease in the volume and level of activity for the asset or liability, it is not appropriate to conclude that all transactions are not orderly (that is, distressed or forced). Circumstances that may indicate that a transaction is not orderly include, but are not limited to, all of the following:
There was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions.
There was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant.
The seller is in or near bankruptcy or receivership (that is, distressed).
The seller was required to sell to meet regulatory or legal requirements (that is, forced).
The transaction price is an outlier when compared with other recent transactions for the same or similar asset or liability.
The reporting entity shall evaluate the circumstances to determine whether the transaction is orderly based on the weight of the evidence.
[Content amended and moved to paragraph 820-10-35-54I]820-10-35-51F Paragraph superseded by Accounting Standards Update 2011-04.The determination of whether a transaction is orderly (or not orderly) is more difficult if there has been a significant decrease in the volume and level of activity for the asset or liability.
[Content amended and moved to paragraph 820-10-35-54I] Accordingly, the reporting entity shall consider of all of the following guidance:
a. If the weight of the evidence indicates the transaction is not orderly, the reporting entity shall place little, if any, weight (compared with other indications of fair value) on that transaction price when estimating fair value or market risk premiums.
b. If the weight of the evidence indicates the transaction is orderly, the reporting entity shall consider that transaction price when estimating fair value or market risk premiums. The amount of weight placed on that transaction price when compared with other indications of fair value will depend on the facts and circumstances such as all of the following:
The volume of the transaction
The comparability of the transaction to the asset or liability being measured at fair value
The proximity of the transaction to the measurement date.
c. If the reporting entity does not have sufficient information to conclude that the whether a transaction is orderly, or that the transaction is not orderly, it shall consider that transaction price when estimating fair value or market risk premiums. However, that transaction price may not be determinative of fair value (that is, that transaction price may not be the sole or primary basis for estimating fair value or market risk premiums). The reporting entity shall place less weight on transactions on which the reporting entity does not have sufficient information to conclude whether the transaction is orderly when compared with other transactions that are known to be orderly.
In its determinations, the reporting entity need not undertake all possible efforts, but shall not ignore information that is available without undue cost and effort. The reporting entity would be expected to have sufficient information to conclude whether a transaction is orderly when it is part to the transaction.
[Content amended and moved to paragraph 820-10-35-54J] 820-10-35-51G Paragraph superseded by Accounting Standards Update 2011-04.Regardless of the valuation technique(s) used, the reporting entity shall include appropriate risk adjustments. For related implementation guidance, see paragraph 820-10-55-8. Risk premiums shall be reflective of an orderly transaction (that is, not a forced or distressed sale) between market participants at the measurement date under current market conditions.
[Content amended and moved to paragraph 820-10-35-54E] 820-10-35-51H Paragraph superseded by Accounting Standards Update 2011-04.When estimating fair value, this Subtopic does not preclude the use of quoted prices provided by third parties, such as pricing services or brokers, if the reporting entity has determined that the quoted prices provided by those parties are determined in accordance with this Subtopic.
[Content amended and moved to paragraph 820-10-35-54K] However, if there has been a significant decrease in the volume or level of activity for the asset or liability, the reporting entity shall evaluate whether those quoted prices are based on current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions (including assumptions about risks). In weighting a quoted price as an input to a fair value measurement, the reporting entity shall place less weight (when compared with other indications of fair value that are based on transactions) on quotes that do not reflect the result of transactions.
[Content amended and moved to paragraph 820-10-35-54L] Furthermore, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) shall be considered when weighting the available evidence, with more weight given to quotes based on binding offers.
[Content amended and moved to paragraph 820-10-35-54M] 51. Amend paragraphs 820-10-35-52 through 35-54, with a link to transition paragraph 820-10-65-8, as follows:
> > Level 3 Inputs 820-10-35-52 Level 3 inputs are
defined in this Subtopic as
unobservable inputs for the asset or liability.
820-10-35-53 Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price
at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect
the reporting entity's own assumptions about
the assumptions that market participants would use
in
when pricing the asset or
liability
liability, (including
including assumptions about
risk).
risk. 820-10-35-54 Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model)
and/or
and the risk inherent in the inputs to the valuation technique. A measurement
(for example, a mark-to-model measurement)
that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one
in
when pricing the
related
asset or liability.
For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (for example, when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the reporting entity has determined that the transaction price or quoted price does not represent fair value, as described in paragraphs 820-10-35-54C through 35-54J). 52. Add paragraphs 820-10-35-54A through 35-54M and related headings, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-54A Unobservable inputs shall be developed based on
A reporting entity shall develop unobservable inputs using the best information available in the circumstances, which might include the reporting entity's own data. In developing unobservable inputs,
the
a reporting entity
may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the reporting entity that is not available to other market participants (for example, an entity-specific synergy). A reporting entity need not undertake
all possible
exhaustive efforts to obtain information about market participant assumptions. However,
the
a reporting entity shall
not ignore
take into account all information about market participant assumptions that is reasonably
available.available without undue cost and effort. Therefore, the reporting entity's own data used to develop unobservable inputs shall be adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions. Paragraph 820-10-55-22 discusses Level 3 inputs for particular assets and liabilities.
Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement. [Content amended as shown and moved from paragraph 820-10-35-55] > > Categorizing Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) within the Fair Value Hierarchy820-10-35-54B Classification
Categorization within the fair value hierarchy of a fair value measurement of an investment within the scope of paragraphs 820-10-15-4 through 15-5 that is measured at
net asset value per share (or its equivalent, for example member units or an ownership interest in partners' capital to which a proportionate share of net assets is attributed) requires judgment, considering the following: If a reporting entity has the ability to redeem its investment with the investee at net asset value per share (or its equivalent) at the measurement date, the fair value measurement of the investment shall be categorized
as a
within Level 2
of the fair value
hierarchymeasurement
. If a reporting entity will never have the ability to redeem its investment with the investee at net asset value per share (or its equivalent), the fair value measurement of the investment shall be categorized
as a Level 3 fair value measurement
within Level 3 of the fair value hierarchy. If a reporting entity cannot redeem its investment with the investee at net asset value per share (or its equivalent) at the measurement date but the investment may be redeemable with the investee at a future date (for example, investments subject to a lockup or gate or investments whose redemption period does not coincide with the measurement date), the reporting entity shall
consider
take into account the length of time until the investment will become redeemable in determining whether the fair value measurement of the investment shall be categorized
as a Level 2 or a Level 3 fair value measurement
within Level 2 or Level 3 of the fair value hierarchy. For example, if the reporting entity does not know when it will have the ability to redeem the investment or it does not have the ability to redeem the investment in the near term at net asset value per share (or its equivalent), the fair value measurement of the investment shall be categorized
as a Level 3 fair value measurement
within Level 3 of the fair value hierarchy.
[Content amended as shown and moved from paragraph 820-10-35-58] > Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased 820-10-35-54C To determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability (or similar assets or liabilities),factors the reporting entity shall evaluate include, but are not limited to, all of the following:
The fair value of an asset or a liability might be affected when there has been a significant decrease in the volume or level of activity for that asset or liability in relation to normal market activity for the asset or liability (or
similar assets or liabilities). To determine whether, on the basis of the evidence available, there has been a significant decrease in the volume or level of activity for the asset or liability, a reporting entity shall evaluate the significance and relevance of factors such as the following: There are few recent transactions. Price quotations are not
based on
developed using current information. Price quotations vary substantially either over time or among market makers (for example, some brokered markets).
Indexes
Indices that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability. There is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the reporting entity's estimate of expected cash flows,
considering
taking into account all available market data about credit and other nonperformance risk for the asset or liability. There is a wide bid-ask spread or significant increase in the bid-ask spread. There is a significant decline
in the activity of, or
there is an absence
of
of, a market for new
issuances
issues (that is, a primary market) for the asset or liability or similar assets or liabilities. Little information is
released
publicly
available (for example,
for transactions that take place in a principal-to-principal market).
The reporting entity shall evaluate the significance and relevance of the factors to determine whether, based on the weight of the evidence, there has been a significant decrease in the volume and level of activity for the asset or liability.
[Content amended as shown and moved from paragraph 820-10-35-51A]820-10-35-54D If
the
a reporting entity concludes
that there has been a significant decrease in the volume
and
or level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities),
transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly). Further
further analysis of the transactions or quoted prices is
needed,
needed. A decrease in the volume or level of activity on its own may not indicate that a transaction price or quoted price does not represent fair value or that a transaction in that market is not orderly. However, if a reporting entity determines that a transaction or quoted price does not represent fair value (for example, there may be transactions that are not orderly), an and a significant
adjustment to the transactions or quoted prices
may
will be necessary
if the reporting entity uses those prices as a basis for measuring fair value to estimate fair value in accordance with this Subtopic
and that adjustment may be significant to the fair value measurement in its entirety. Significant adjustments
Adjustments also may be necessary in other circumstances (for example,
if
when a price for a similar asset requires significant adjustment to make it
more
comparable to the asset being measured or when the price is stale).
[Content amended as shown and moved from paragraph 820-10-35-51B] 820-10-35-54E This
Subtopic
Topic does not prescribe a methodology for making significant adjustments to transactions or quoted
prices. prices when estimating fair value. The guidance beginning in paragraph 820-10-35-24 discusses
See paragraphs 820-10-35-24 through 35-27 and 820-10-55-3A through 55-3G for a discussion of the use of valuation techniques
in estimating
when measuring fair value.
[Content amended as shown and moved from paragraph 820-10-35-51C] Regardless of the valuation
technique(s)
technique used,
the
a reporting entity shall include appropriate risk
adjustments
.
adjustments, including a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows of an asset or a liability
(see paragraph 820-10-55-8).
For related implementation guidance, see paragraph 820-10-55-8. Risk premiums shall be reflective of an orderly transaction (that is, not a forced or distressed sale) between market participants at the measurement date under current market conditions.
[Content amended as shown and moved from paragraph 820-10-35-51G] Otherwise, the measurement does not faithfully represent fair value. In some cases, determining the appropriate risk adjustment might be difficult. However, the degree of difficulty alone is not a sufficient basis on which to exclude a risk adjustment. The risk adjustment shall be reflective of an orderly transaction between market participants at the measurement date under current market conditions 820-10-35-54F If there has been a significant decrease in the volume
and
or level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate (for example, the use of a market approach and a present value technique). When weighting indications of fair value resulting from the use of multiple valuation techniques,
the
a reporting entity shall consider the reasonableness of the range of fair value
estimates
measurements. The objective is to determine the point within
that
the range that is most representative of fair value under current market conditions. A wide range of fair value
estimates
measurements may be an indication that further analysis is needed.
[Content amended as shown and moved from paragraph 820-10-35-51C] 820-10-35-54G Even
if
when there has been a significant decrease in the volume
and
or level of activity for the asset or
liability and regardless of the valuation technique(s) used,
liability, the objective of a fair value measurement remains the same.
The glossary defines fair value as
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or
distressed
distress sale) between market participants at the measurement date under current market conditions.
[Content amended as shown and moved from paragraph 820-10-35-51D] 820-10-35-54H Determining
Estimating the price at which
willing
market participants would
transact
be willing to enter into a transaction at the measurement date under current market conditions if there has been a significant decrease in the volume
and
or level of activity for the asset or liability depends on the facts and circumstances
at the measurement date and requires
the use of significant
judgment.
However, the
A reporting entity's intention to hold the asset or
to settle or otherwise fulfill the liability is not relevant
in estimating fair value. Fair
when measuring fair value because fair value is a market-based measurement, not an entity-specific measurement.
[Content amended as shown and moved from paragraph 820-10-35-51D] > Identifying Transactions That Are Not Orderly 820-10-35-54I The determination of whether a transaction is orderly (or
is not orderly) is more difficult if there has been a significant decrease in the volume
and
or level of activity for the asset or
liability.
liability in relation to normal market activity for the asset or liability (or similar assets or liabilities). [Content amended as shown and moved from paragraph 820-10-51F] Even if there has been a significant decrease in the volume and level of activity for the asset or liability, it is not appropriate to conclude that all transactions are not orderly (that is, distressed or forced).
In such circumstances, it is not appropriate to conclude that all transactions in that market are not orderly (that is, forced liquidations or distress sales) . Circumstances that may indicate that a transaction is not orderly include
, but are not limited to, all of
the following: There was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions. There was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant. The seller is in or near bankruptcy or receivership (that is,
the seller is distressed). The seller was required to sell to meet regulatory or legal requirements (that is,
the seller was forced). The transaction price is an outlier when compared with other recent transactions for the same or
a similar asset or liability.
The
A reporting entity shall evaluate the circumstances to determine
whether the transaction is orderly based
whether, on the weight of the
evidence.
evidence available, the transaction is orderly. [Content amended as shown and moved from paragraph 820-10-51E]820-10-35-54J Accordingly, the
A reporting entity shall consider
of
all of the following
when measuring fair value or estimating market risk premiums guidance
: a. If the
weight of the
evidence indicates the transaction is not orderly, the
a reporting entity shall place little, if any, weight (compared with other indications of fair value) on that transaction price
when estimating fair value or market risk premiums
. b. If the
weight of the
evidence indicates
the
that a transaction is orderly,
the
a reporting entity shall
consider
take into account that transaction price
when estimating fair value or market risk premiums
. The amount of weight placed on that transaction price when compared with other indications of fair value will depend on the facts and
circumstances
circumstances, such as
all of
the following: The volume of the transaction The comparability of the transaction to the asset or liability being measured
at fair value
The proximity of the transaction to the measurement date. c. If
the
a reporting entity does not have sufficient information to conclude
that the transaction is orderly or that the transaction is not orderly,
whether a transaction is orderly, it shall
consider that
take into account
the transaction price
when estimating fair value or market risk premiums
. However, that transaction price may not
be determinative of
represent fair value (that is,
that
the transaction price may not be
is not necessarily the sole or primary basis for
estimating
measuring fair value or
estimating market risk premiums).
The
When a reporting entity
shall place less weight on transactions on which the reporting entity
does not have sufficient information to conclude whether
the transaction is orderly
particular transactions are orderly, the reporting entity shall place less weight on those transactions when compared with other transactions that are known to be orderly.
In its determinations, the
A reporting entity need not undertake
all possible efforts,
exhaustive efforts to determine whether a transaction is orderly, but
it shall not ignore information that is
reasonably available. available without undue cost and effort. The reporting entity would be expected to have sufficient information to conclude whether a transaction is orderly when it is party to the transaction.
When a reporting entity is a party to a transaction, it is presumed to have sufficient information to conclude whether the transaction is orderly. [Content amended as shown and moved from paragraph 820-10-35-51F]> Using Quoted Prices Provided by Third Parties820-10-35-54K When estimating fair value,
Thisthis Subtopic
Topic does not preclude the use of quoted prices provided by third parties, such as pricing services or brokers, if
the
a reporting entity has determined that the quoted prices provided by those parties are
determined
developed in accordance with this
Subtopic
Topic.
[Content amended as shown and moved from paragraph 820-10-35-51H] 820-10-35-54L However, if
If there has been a significant decrease in the volume or level of activity for the asset or liability,
the
a reporting entity shall evaluate whether
those
the quoted prices
provided by third parties are
based on
developed using current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions (including assumptions about
risks
risk). In weighting a quoted price as an input to a fair value measurement,
the
a reporting entity
shall place
places less weight (when compared with other indications of fair value that
are based on
reflect the results of transactions) on quotes that do not reflect the result of transactions.
[Content amended as shown and moved from paragraph 820-10-35-51H] 820-10-35-54M Furthermore, the nature of
the
a quote (for example, whether the quote is an indicative price or a binding offer) shall be
considered
taken into account when weighting the available evidence, with more weight given to quotes
based on
provided by third parties that represent binding offers.
[Content amended as shown and moved from paragraph 820-10-35-51H] 53. Supersede paragraph 820-10-35-55, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-55 Paragraph superseded by Accounting Standards Update 2011-04. Unobservable inputs shall be developed based on the best information available in the circumstances, which might include the reporting entity's own data. In developing unobservable inputs, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity shall not ignore information about market participant assumptions that is reasonably available without undue cost and effort. Therefore, the reporting entity's own data used to develop unobservable inputs shall be adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions. Paragraph 820-10-55-22 discusses Level 3 inputs for particular assets and liabilities.
[Content amended and moved to paragraph 820-10-35-54A] 820-10-35-55A Paragraph not used.
820-10-35-55B Paragraph not used. 54. Supersede paragraphs 820-10-35-56 through 35-58 and related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > Inputs Based on Bid and Ask Prices
820-10-35-56 Paragraph superseded by Accounting Standards Update 2011-04. If an input used to measure fair value is based on bid and ask prices (for example, in a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value, regardless of where in the fair value hierarchy the input falls (Level 1, 2, or 3). The use of bid prices for long positions (assets) and ask prices for short positions (liabilities) is permitted but not required.
[Content amended and moved to paragraph 820-10-35-36C] 820-10-35-57 Paragraph superseded by Accounting Standards Update 2011-04. This Subtopic does not preclude the use of mid-market pricing or other pricing conventions as a practical expedient for fair value measurements within a bid-ask spread. Bid-ask spread pricing methods appropriate under Securities and Exchange Commission (SEC) Accounting Series Release No. 118, Accounting for Investment Securities by Registered Investment Companies, are appropriate under this Subtopic.
[Content amended and moved to paragraph 820-10-35-36D]> > Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
820-10-35-58 Paragraph superseded by Accounting Standards Update 2011-04. Classification within the fair value hierarchy of a fair value measurement of an investment within the scope of paragraphs 820-10-15-4 through 15-5 that is measured at net asset value per share (or its equivalent, for example member units or an ownership interest in partners' capital to which a proportionate share of net assets is attributed) requires judgment, considering the following:
If a reporting entity has the ability to redeem its investment with the investee at net asset value per share (or its equivalent) at the measurement date, the fair value measurement of the investment shall be categorized as a Level 2 fair value measurement.
If a reporting entity will never have the ability to redeem its investment with the investee at net asset value per share (or its equivalent), the fair value measurement of the investment shall be categorized as a Level 3 fair value measurement.
If a reporting entity cannot redeem its investment with the investee at net asset value per share (or its equivalent) at the measurement date but the investment may be redeemable with the investee at a future date (for example, investments subject to a lockup or gate or investments whose redemption period does not coincide with the measurement date), the reporting entity shall consider the length of time until the investment will become redeemable in determining whether the fair value measurement of the investment shall be categorized as a Level 2 or a Level 3 fair value measurement. For example, if the reporting entity does not know when it will have the ability to redeem the investment or it does not have the ability to redeem the investment in the near term at net asset value per share (or its equivalent), the fair value measurement of the investment shall be categorized as a Level 3 fair value measurement.
[Content amended and moved to paragraph 820-10-35-54B] 55. Amend the heading preceeding paragraph 820-10-35-59, with a link to transition paragraph 820-10-65-8, as follows:
> Measuring the Fair Value Measurements
of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) 820-10-35-59 A reporting entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of paragraphs 820-10-15-4 through 15-5 using the 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) of the investment, if the net asset value per share of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity's measurement date.
820-10-35-60 If the net asset value per share of the investment obtained from the investee is not as of the reporting entity's measurement date or is not calculated in a manner consistent with the measurement principles of Topic 946, the reporting entity shall consider whether an adjustment to the most recent net asset value per share is necessary. The objective of any adjustment is to estimate a net asset value per share for the investment that is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity's measurement date. 56. Amend paragraph 820-10-35-61, with a link to transition paragraph 820-10-65-8, as follows:
820-10-35-61 A reporting entity shall decide on an investment-by-investment basisThe decision about
whether to apply the
guidance
practical expedient in paragraph 820-10-35-59
shall be made on an investment-by-investment basis
and shall
be applied
apply that practical expedient consistently to the fair value measurement of
a
the reporting entity's entire position in a particular investment, unless it is probable at the measurement date that
a
the reporting entity will sell a portion of an investment at an amount different from net asset value per share (or its equivalent) as described in the following paragraph. In those situations, the reporting entity shall account for the portion of the investment that is being sold in accordance with
other provisions in
this
Subtopic
Topic (that is, the reporting entity shall not apply the guidance in paragraph 820-10-35-59).
820-10-35-62 A reporting entity is not permitted to estimate the fair value of an investment (or a portion of the investment) within the scope of paragraphs 820-10-15-4 through 15-5 using the net asset value per share of the investment (or its equivalent) as a practical expedient if, as of the reporting entity's measurement date, it is probable that the reporting entity will sell the investment for an amount different from the net asset value per share (or its equivalent). A sale is considered probable only if all of the following criteria have been met as of the reporting entity's measurement date: Management, having the authority to approve the action, commits to a plan to sell the investment. An active program to locate a buyer and other actions required to complete the plan to sell the investment have been initiated. The investment is available for immediate sale subject only to terms that are usual and customary for sales of such investments (for example, a requirement to obtain approval of the sale from the investee or a buyer's due diligence procedures). Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. 57. Amend paragraph 820-10-50-1 and supersede its related heading, with a link to transition paragraph 820-10-65-8, as follows:
Disclosure> Recurring Measurements
820-10-50-1 The
A reporting entity shall disclose information that
enables
helps users of its financial statements
to
assess both of the following: For assets and liabilities that are measured at
fair value on a recurring
or nonrecurring basis
in periods subsequent to initial recognition (for example, trading securities),
in the statement of financial position after initial recognition, the valuation techniques and
inputs used to develop those measurements For recurring fair value measurements using significant
unobservable inputs (Level 3), the effect of the measurements on earnings (or changes in net assets)
or other comprehensive income for the period. 58. Add paragraphs 820-10-50-1A through 50-1B, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-1A To meet the objectives in the preceding paragraph, a reporting entity shall consider all of the following:The level of detail necessary to satisfy the disclosure requirementsHow much emphasis to place on each of the various requirementsHow much aggregation or disaggregation to undertakeWhether users of financial statements need additional information to evaluate the quantitative information disclosed. If the disclosures provided in accordance with this Topic and other Topics are insufficient to meet the objectives in the preceding paragraph, a reporting entity shall disclose additional information necessary to meet those objectives.820-10-50-1B Example 8, Cases A and B (see paragraphs 820-10-55-60 through 55-63)
Paragraphs 820-10-55-99 through 55-107 illustrate disclosures about
recurring
fair value measurements.
[Content amended as shown and moved from paragraph 820-10-50-4] Amend paragraph 820-10-50-2, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-2 To meet the objectives
inof the preceding
paragraph
820-10-50-1,
the
a reporting entity shall disclose
, at a minimum, all of
the
following information
in (a) through (e) below for each interim and annual period separately
for each class of assets and
liabilities.
liabilities (see paragraph 820-10-50-2B for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Topic) in the statement of financial position after initial recognition: The reporting entity shall determine appropriate classes of assets and liabilities on the basis of guidance in the following paragraph. It shall provide sufficient information to permit reconciliation of the fair value measurement disclosures for the various classes of assets and liabilities to the line items in the statement of financial position.
a.
The
For recurring and nonrecurring fair value measurements, the fair value measurement at the
end of the reporting
date.
period, and for nonrecurring fair value measurements, the reasons for the measurement. Recurring fair value measurements of assets or liabilities are those that other Topics require or permit in the statement of financial position at the end of each reporting period. Nonrecurring fair value measurements of assets or liabilities are those that other Topics require or permit in the statement of financial position in particular circumstances (for example, when a reporting entity measures a longlived asset or disposal group classified as held for sale at fair value less costs to sell in accordance with Topic 360 because the asset's fair value less costs to sell is lower than its carrying amount). b.
For recurring and nonrecurring fair value measurements, The
the level
ofwithin
the fair value hierarchy
in
within which the fair value
measurements are categorized in their entirety (Level 1, 2, or 3).measurement in its entirety falls, segregating the fair value measurement using any of the following:
1.
Subparagraph superseded by Accounting Standards Update 2011-04.Quoted prices in active markets for identical assets or liabilities (Level 1)
2.
Subparagraph superseded by Accounting Standards Update 2011-04.Significant other observable inputs (Level 2)
3.
Subparagraph superseded by Accounting Standards Update 2011-04.Significant unobservable inputs (Level 3).
bb.
For assets and liabilities held at the end of the reporting period that are measured at fair value on a recurring basis, theThe
amounts of
anysignificant
transfers between Level 1 and Level 2 of the fair value
hierarchy and the reasons for the transfers.
hierarchy, the reasons for those transfers, and the reporting entity's policy for determining when transfers between levels are deemed to have occurred (see paragraph 820-10-50-2C). Significant transfers
Transfers into each level shall be disclosed
and discussed separately from transfers out of each level.
For this purpose, significance shall be judged with respect to earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, with respect to total equity. A reporting entity shall disclose and consistently follow its policy for determining when transfers between levels are recognized. The policy about the timing of recognizing transfers shall be the same for transfers into the levels as that for transfers out of the levels. Examples of policies for when to recognize the transfers are as follows:
1.
Subparagraph superseded by Accounting Standards Update 2011-04.The actual date of the event or change in circumstances that caused the transfer
2.
Subparagraph superseded by Accounting Standards Update 2011-04.The beginning of the reporting period
3.
Subparagraph superseded by Accounting Standards Update 2011-04.The end of the reporting period.
[Content amended and moved to paragraph 820-10-50-2C] bbb. For recurring and nonrecurring fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement If there has been a change in
the
valuation
techniquetechnique(s)
(for example, changing from a
{add glossary link}market approach
{add glossary link} to an
{add glossary link}income approach
{add glossary link} or the use of an additional valuation technique), the reporting entity shall disclose that change and the
reason
reason(s) for making it.
[Content amended as shown and moved from paragraph 820-10-50-2(e)] For fair value measurements categorized within Level 3 of the fair value hierarchy, a reporting entity shall provide quantitative information about the significant unobservable inputs used in the fair value measurement. A reporting entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the reporting entity when measuring fair value (for example, when a reporting entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure, a reporting entity cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the reporting entity. c. For
recurring fair value measurements
using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to any of the following:
categorized within Level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances, disclosing separately changes during the period attributable to the following: 1. Total gains or losses for the period
(realized and unrealized), separately presenting gains or losses included
recognized in earnings (or changes in net
assets),assets) and gains or losses recognized in other comprehensive income, and the line item(s)a description of where those gains or losses included in earnings (or changes in net assets) are reported
in the statement of income (or activities)
in which those gains or losses are recognizedor in other comprehensive income
1a. Total gains or losses for the period recognized in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognized2. Purchases, sales,
issuances,
issues, and settlements (each
type
of those types of changes disclosed separately) 3.
Transfers in and/or out of Level 3 and the reasons for those transfers.
The amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons for those transfers, and the reporting entity's policy for determining when transfers between levels are deemed to have occurred (see paragraph 820-10-50-2C). Significant transfers
Transfers into Level 3 shall be disclosed
and discussed separately from
significant
transfers out of Level 3.
For this purpose, significance shall be judged with respect to earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, with respect to total equity. A reporting entity shall disclose and consistently follow its policy for determining when transfers between levels are recognized. The policy about the timing of recognizing transfers shall be the same for transfers into Level 3 as that for transfers out of Level 3. Examples of policies for when to recognize the transfers are as follows:
i.
Subparagraph superseded by Accounting Standards Update 2011-04.The actual date of the event or change in circumstances that caused the transfer
ii.
Subparagraph superseded by Accounting Standards Update 2011-04. The beginning of the reporting period
iii.
Subparagraph superseded by Accounting Standards Update 2011-04.The end of the reporting period.
d.
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, theThe
amount of the total gains or losses for the period in (c)(1) included in earnings (or changes in net assets) that
are
is attributable to the change in unrealized gains or losses relating to those assets and liabilities
still
held at the
end of the reporting
date
period, and
the line item(s) in the statement of income (or activities) in which those unrealized gains or losses are recognized.a description of where those unrealized gains or losses are reported in the statement of income (or activities).
e.
Subparagraph superseded by Accounting Standards Update 2011-04.For fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3), a description of the valuation technique (or multiple valuation techniques) used, such as the market approach, income approach, or the cost approach, and the inputs used in determining the fair values of each class of assets or liabilities. If there has been a change in the valuation technique(s) (for example, changing from a market approach to an income approach or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason for making it. For examples of disclosures that a reporting entity may present to comply with the requirement to disclose the inputs used in measuring fair value in this paragraph, see paragraphs 820-10-55-22A through 55-22B.
[Content amended and moved to paragraph 820-10-50-2(bbb)] f. For recurring and nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy, a description of the valuation processes used by the reporting entity (including, for example, how an entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period). See paragraph 820-10-55-105 for further guidance.g. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a narrative description of the sensitivity of the fair
value measurement to changes in unobservable inputs if a change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. If there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement, a reporting entity shall also provide a description of those interrelationships and of how they might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. To comply with that disclosure requirement, the narrative description of the sensitivity to changes in unobservable inputs shall include, at a minimum, the unobservable inputs disclosed when complying with paragraph 820-10-50-2(bbb).h. For recurring and nonrecurring fair value measurements, if the highest and best use of a nonfinancial asset differs from its current use, a reporting entity shall disclose that fact and why the nonfinancial asset is being used in a manner that differs from its highest and best use.60. Supersede paragraph 820-10-50-2A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-2A Paragraph superseded by Accounting Standards Update 2011-04. For equity and debt securities, class shall be determined on the basis of the nature and risks of the investments in a manner consistent with the guidance in paragraph 320-10-50-1B and, if applicable, shall be the same as the guidance on major security type as described in paragraph 942-320-50-2 even if the equity securities or debt securities are not within the scope of paragraph 320-10-50-1B. For all other assets and liabilities, judgment is needed to determine the appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided. Fair value measurement disclosures for each class of assets and liabilities often will require greater disaggregation than the reporting entity's line items in the statement of financial position. A reporting entity shall determine the appropriate classes for those disclosures on the basis of the nature and risks of the assets and liabilities and their classification in the fair value hierarchy (that is, Levels 1, 2, and 3). In determining the appropriate classes for fair value measurement disclosures, the reporting entity shall consider the level of disaggregated information required for specific assets and liabilities under other Topics. For example, under Topic 815, disclosures about derivative instruments are presented separately by type of contract such as interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, and credit contracts. The classification of the asset or liability in the fair value hierarchy also shall affect the level of disaggregation because of the different degrees of uncertainty and subjectivity involved in Level 1, Level 2, and Level 3 measurements. For example, the number of classes may need to be greater for fair value measurements using significant unobservable inputs (that is, Level 3 measurements) to achieve the disclosure objectives because Level 3 measurements have a greater degree of uncertainty and subjectivity.
61. Add paragraphs 820-10-50-2B through 50-2F, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-2B A reporting entity shall determine appropriate classes of assets and liabilities on the basis of the following:The nature, characteristics, and risks of the asset or liabilityThe level of the fair value hierarchy within which the fair value measurement is categorized. The number of classes may need to be greater for fair value measurements categorized within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity. Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgment. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. However, a reporting entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. If another Topic specifies the class for an asset or a liability, a reporting entity may use that class in providing the disclosures required in this Topic if that class meets the requirements in this paragraph.820-10-50-2C A reporting entity shall disclose and consistently follow its policy for determining when transfers between levels
of the fair value hierarchy are
recognized.
deemed to have occurred in accordance with paragraph 820-10-50-2(bb) and (c)(3). The policy about the timing of recognizing transfers shall be the same for transfers into the levels as that for transfers out of the levels. Examples of policies for
determining the timing of when to recognize the transfers are as follows
include the following:
a.1.
The
actual
date of the event or change in circumstances that caused the transfer
b.2.
The beginning of the reporting period
c.3.
The end of the reporting period.
[Content amended as shown and moved from paragraph 820-10-50-2(bb)]820-10-50-2D If a reporting entity makes an accounting policy decision to use the exception in paragraph 820-10-35-18D, it shall disclose that fact. 820-10-50-2E For each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed, a reporting entity shall disclose the information required by paragraph 820-10-50-2(b), (bbb), and (h). However, a reporting entity is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb). For such assets and liabilities, a reporting entity does not need to provide the other disclosures required by this Topic. 820-10-50-2F A {Add glossary link to first definition}nonpublic entity{Add glossary link to first definition} is not required to disclose the information required by paragraph 820-10-50-2(bb) and (g) and paragraph 820-10-50-2E unless required by another Topic. 820-10-50-3 For derivative assets and liabilities, the reporting entity shall present both of the following: The fair value disclosures required by paragraph 820-10-50-2(a) through (bb) on a gross basis (which is consistent with the requirement of paragraph 815-10-50-4B(a)) The reconciliation disclosure required by paragraph 820-10-50-2(c) through (d) on either a gross or a net basis. 62. Supersede paragraph 820-10-50-4 and amend paragraph 820-10-50-4A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-4 Paragraph superseded by Accounting Standards Update 2011-04.Example 8, Cases A and B (see paragraphs 820-10-55-60 through 55-63) illustrate disclosures about recurring measurements.
[Content amended and moved to paragraph 820-10-50-1B]> Liability Issued with an Inseparable Third-Party Credit Enhancement 820-10-50-4A For a liability
measured at fair value and having the characteristics set forth in paragraph 820-10-25-1
issued with an inseparable third-party credit enhancement, an issuer shall disclose the existence of
thata third-party
credit enhancement
on its issued liability
.
Paragraph 820-10-35-18A states that, for the issuer, the unit of accounting for a liability measured or disclosed at fair value does not include the third-party credit enhancement.
63. Supersede paragraphs 820-10-50-5 through 50-6 and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> Nonrecurring Measurements
820-10-50-5 Paragraph superseded by Accounting Standards Update 2011-04. For assets and liabilities that are measured at fair value on a nonrecurring basis in periods after initial recognition (for example, impaired assets), the reporting entity shall disclose information that enables users of its financial statements to assess the valuation techniques and inputs used to develop those measurements. To meet that objective, the reporting entity shall disclose all of the following information for each interim and annual period separately for each class of assets and liabilities. The reporting entity shall determine classes of assets and liabilities on the basis of the guidance in paragraph 820-10-50-2A.
a. The fair value measurement recorded during the period and the reasons for the measurement
b. The level within the fair value hierarchy in which the fair value measurement in its entirety falls, segregating the fair value measurement using any of the following:
1. Quoted prices in active markets for identical assets or liabilities (Level 1)
2. Significant other observable inputs (Level 2)
3. Significant unobservable inputs (Level 3).
c. Subparagraph superseded by Accounting Standards Update No. 2010-06
d. For fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3), the disclosure required by paragraph 820-10-50-2(e).
820-10-50-6 Paragraph superseded by Accounting Standards Update 2011-04. Example 8, Case C (see paragraph 820-10-55-64) illustrates disclosures about nonrecurring measurements.
64. Amend paragraphs 820-10-50-6A through 50-8, with a link to transition paragraph 820-10-65-8, as follows:
> Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) 820-10-50-6A For investments that are within the scope of paragraphs 820-10-15-4 through 15-5 (regardless of whether the practical expedient in paragraph 820-10-35-59 has been applied) and measured at fair value on a recurring or nonrecurring basis during the period,
the
a reporting entity shall disclose information that
enables
helps users of its financial statements to understand the nature and risks of the investments and whether the investments are probable of being sold at amounts different from
{add glossary link}net asset value per share
{add glossary link} (or its equivalent, such as member units or an ownership interest in partners' capital to which a proportionate share of net assets is attributed). To meet that objective, to the extent applicable,
the
a reporting entity shall disclose, at a minimum,
all of
the following information for each
interim and annual period separately for each
class of
investment:investment (class of investment shall be determined on the basis of the nature and risks of the investments in a manner consistent with the guidance for major security types in paragraph 320-10-50-1B):
The fair value
measurement (as determined by applying paragraphs 820-10-35-59 through 35-62) of the investments in the
class,
class at the reporting date and a description of the significant investment strategies of the investee(s) in the class. For each class of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity's estimate of the period of time over which the underlying assets are expected to be
be
liquidated by the investees. The amount of the reporting entity's unfunded commitments related to investments in the class. A general description of the terms and conditions upon which the investor may redeem investments in the class (for example, quarterly redemption with 60 days' notice). The circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise redeemable investments that are restricted from redemption as of the reporting entity's measurement date, the reporting entity shall disclose its estimate of when the restriction from redemption might lapse. If an estimate cannot be made, the reporting entity shall disclose that fact and how long the restriction has been in effect. Any other significant restriction on the ability to sell investments in the class at the measurement date. If a reporting entity determines that it is probable that it will sell an investment(s) for an amount different from net asset value per share (or its equivalent) as described in paragraph 820-10-35-62, the reporting entity shall disclose the total fair value of all investments that meet the criteria in paragraph 820-10-35-62 and any remaining actions required to complete the sale. If a group of investments would otherwise meet the criteria in paragraph 820-10-35-62 but the individual investments to be sold have not been identified (for example, if a reporting entity decides to sell 20 percent of its investments in private equity funds but the individual investments to be sold have not been identified), so the investments continue to qualify for the practical expedient in paragraph 820-10-35-59, the reporting entity shall disclose its plans to sell and any remaining actions required to complete the sale(s).
> Changes in Valuation Techniques or Their Application 820-10-50-7 As discussed in paragraph 250-10-50-5, the
disclosure provisions of
disclosures required by Topic 250 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its application.
> Tabular Format Required 820-10-50-8 A reporting entity shall present theThe
quantitative disclosures required by this
Subtopic shall be presented using
Topic in a tabular format. (
See Example 8 [paragraph 820-10-55-60].)
820-10-50-8A Paragraph not used. 65. Supersede paragraph 820-10-50-9 and its related heading, with a link to transition paragraph 820-10-65-8, as follows:
> Relation to Other Disclosure Requirements
820-10-50-9 Paragraph superseded by Accounting Standards Update 2011-04. The reporting entity is encouraged, but not required, to:
Combine the fair value information disclosed under this Subtopic with the fair value information disclosed under other Subtopics (for example, Section 825-10-50) in the periods in which those disclosures are required, if practicable
Disclose information about other similar measurements (for example, inventories measured at market value under Topic 330), if practicable.
66. Amend paragraph 820-10-50-10, with a link to transition paragraph 820-10-65-8, as follows:
820-10-50-10 Plan assets of a defined benefit pension or other postretirement plan that are accounted for
under
in
accordance with Topic 715 are not subject to the disclosure requirements in paragraphs 820-10-50-1 through 50-9. Instead, the disclosures required in paragraphs 715-20-50-1(d)(iv) and 715-20-50-5(c)(iv) shall apply for fair value measurements of plan assets of a defined benefit pension or other postretirement plan. 67. Amend paragraphs 820-10-55-1 through 55-3 and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
Implementation Guidance and Illustrations > Implementation Guidance > > The Fair Value Measurement Approach 820-10-55-1 Because the exit price objective in paragraph 820-10-30-2 applies for all assets and liabilities measured at fair value, any fair value measurement requires that the reporting entity
The objective of a fair value 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: The particular asset or liability that is the subject of the measurement (consistent with its
unit of account) For
an
a nonfinancial asset, the valuation premise
that is appropriate for the measurement (consistent with its
highest and best use) The principal (or most advantageous) market for the asset or liability
(for an asset, consistent with its highest and best use)
The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop
inputs that represent the assumptions that
market participants would use
in
when pricing the asset or liability and the level
in
of the fair value hierarchy within which the inputs
fall
are categorized.
820-10-55-2 The judgments applied in different valuation situations
often will
may be different. This Section describes
in general terms certain provisions of this Subtopic and provides Examples that incorporate simplified assumptions to illustrate the application of those provisions.
the judgments that might apply when a reporting entity measures fair value in different valuation situations.> > The Fair Value Measurement Approach
> > > The
Valuation Premise for Nonfinancial Assets—Highest and Best Use
820-10-55-3 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.an asset inuse, the in-use valuation premise discussed in paragraph 820-10-35-12 can be incorporated in the measurement differently, depending on the circumstances.
For
instance
example: 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.using an in-use or an in-exchange valuation premise. For example, that
That might be the case if the asset is a business
(such as a reporting unit)
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
the context of
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).
The in-use valuation premise might be incorporated in the fair value of the asset
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
inexchange
used on a standalone basis.
For example, that
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).
The in-use valuation premise might be incorporated in the fair value of the asset
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-inprocess inventory that is unique and market participants would
complete
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
complete
convert the inventory into finished goods
would be available to market participants. In that case, market participants would have the specialized machinery in place or would acquire the specialized machinery in conjunction with the inventory.
The in-use valuation premise might be incorporated in the fair value of the asset through
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.
For example, that
That might be the case when using the multiperiod excess earnings method to measure the fair value of
certain
an intangible
assets
asset because that valuation technique specifically
considers
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. In more limited situations,
when a reporting entity uses an asset within a group of assets, the reporting entity the asset
might
be measured
measure the asset at an amount that approximates its fair value in-use when allocating the fair value of the asset group
within which the asset is used
to the individual assets of the group.
For example, that
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). 68. Add paragraphs 820-10-55-3A through 820-10-55-3G and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Valuation Techniques > > > > Market Approach 820-10-55-3A The market approach
is defined in this Subtopic as a valuation technique that
uses prices and other relevant information generated by market transactions involving identical or comparable
assets
(that is, similar) assets, or liabilities (including a business).
liabilities, or a group of assets and liabilities, such as a business. [Content amended as shown and moved from paragraph 82010-35-29]820-10-55-3B For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might
lie
be in ranges with a different multiple for each comparable. The selection of
where within the range
the appropriate multiple
falls
within the range requires judgment, considering
qualitative and quantitative factors specific to the measurement
(qualitative and quantitative)
.
[Content amended as shown and moved from paragraph 820-10-35-30]820-10-55-3C 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
securities, without relying exclusively on quoted prices for the specific securities, but rather
by
relying on the securities' relationship to other benchmark quoted securities.
[Content amended as shown and moved from paragraph 820-10-35-31]> > > > Cost Approach 820-10-55-3D The cost approach
is defined in this Subtopic as a valuation technique based on
reflects the amount that
currently
would be required
currently to replace the service capacity of an asset (often referred to as current replacement cost).
[Content amended as shown and moved from paragraph 820-10-35-34] 820-10-55-3E From the perspective of a market participant
(seller)
seller, the price that would be received for the asset is
determined
based on the cost to a market participant
(buyer)
buyer to acquire or construct a substitute asset of comparable utility, adjusted for
{remove glossary link}obsolescence{remove glossary link}.
[Content amended as shown and moved from paragraph 820-10-35-35] 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 (
based on
using specified service lives).
[Content moved from Master Glossary] 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. > > > > Income Approach820-10-55-3F The income approach
is defined in this Subtopic as an approach that uses valuation techniques to convert
converts future amounts (for example, cash flows or
earnings
income and expenses) to a single
present
current (that is, discounted) amount
(discounted)
.
When the income approach is used, the fair value measurement reflectsThe measurement is based on the value indicated by
current market expectations about those future amounts.
[Content amended as shown and moved from paragraph 820-10-35-32]820-10-55-3G Those valuation techniques include
, for example, the following:
Present value techniques Option-pricing models
(which incorporate present value techniques)
, such as the Black-Scholes-Merton formula
(a closed-form model) and
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 optionThe multiperiod excess earnings method, which is used to measure the fair value of
certain
some intangible assets.
[Content amended as shown and moved from paragraph 820-10-35-33]69. Amend paragraphs 820-10-55-4 through 55-19 and 820-10-55-21 through 55-22, with a link to transition paragraph 820-10-65-8, as follows:
> > > Present Value Techniques 820-10-55-4 FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, provides guidance for using
Paragraphs 820-10-55-5 through 55-20 describe the use of {remove glossary link}present value{remove glossary link} techniques to measure fair value.
That guidance focuses
Those paragraphs focus on a
traditional or
discount rate adjustment technique and an
expected cash flow (expected present value) technique.
This Section clarifies that guidance. (That guidance is included or otherwise referred to principally in paragraphs 39–46, 51, 62–71, 114, and 115 of Concepts Statement 7.) This Section
Those paragraphs neither
prescribes
prescribe the use of
one
a single specific present value technique nor
limits
limit the use of present value techniques to measure fair value to the techniques discussed
herein
. 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.
> > > > The Components of a Present Value Measurement 820-10-55-5 Present value (that is, an application of the income approach) 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
liability,
a liability using
a present value
technique should captur
e
captures all of the following elements from the perspective of market participants
as of
at the measurement date: An estimate of future cash flows for the asset or liability being measured. Expectations about possible variations in the amount
and/or
and timing of the cash flows representing the uncertainty inherent in the cash flows. 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 riskfree interest rate.
U.S. Treasury securities are deemed (default) risk free because they pose neither uncertainty in timing nor risk of default to the holder.
The price for bearing the uncertainty inherent in the cash flows (
that is, a risk premium). Other
case-specific
factors that
market participants would
be considered by market participants
take into account in the circumstances.
In the case of
For a liability, the
nonperformance risk relating to that liability, including the reporting entity's (
that is, the obligor's) own
{add glossary link}credit risk
{add glossary link}.
> > > > General Principles 820-10-55-6 Present value techniques differ in how they capture
those
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: Cash flows and discount rates should reflect assumptions that market participants would use
in
when pricing the asset or liability. Cash flows and discount rates should
consider
take into account only
the factors
attributed
attributable to the asset
(or liability)
or liability being measured. 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
would
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. Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows
, which (that
include the effect of inflation
) should
, 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 (
that
exclude the effect of inflation) should
, 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
(for example, a U.S. Treasury rate is quoted on a pretax basis, as is a London Interbank Offered Rate [LIBOR] or a prevailing term loan rate)
. Discount rates should be consistent with the underlying economic factors of the currency in which the cash flows are denominated.
> > > > Risk and Uncertainty 820-10-55-7 A fair value
measurement,
measurement using present
value,
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
will be
are uncertain. Even contractually fixed amounts,
like
such as the payments on a loan,
will be
are uncertain if there is risk of default.
820-10-55-8 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
because of
as compensation for the
risk (uncertainty)
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
basis on which
reason to exclude a risk
adjustment
premium.
820-10-55-9 Present value techniques differ in how they adjust for risk and in the type of cash flows they use. For example: The discount rate adjustment technique
(see paragraphs 820-10-55-10 through 55-12) uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows. Method 1 of the expected present value technique
(see paragraph 820-10-55-15) uses
a risk-free rate and
risk-adjusted expected cash flows
and a risk-free rate. Method 2 of the expected present value technique
(see paragraph 820-10-55-16) uses expected cash flows that are not risk adjusted and a
riskadjusted
discount rate
adjusted to include the risk premium that market participants require. (which
That rate is different from the rate used in the discount rate adjustment
technique. technique) and expected cash flows.
> > > > Discount Rate Adjustment Technique 820-10-55-10 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
a
an observed or estimated market rate
that corresponds to an observed market rate associated with
for such conditional cash flows (
that is, a market rate of return).
820-10-55-11 The
application of 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 approach).
Example 2 (see paragraph 820-10-55-33)
Paragraph 820-10-55-33 illustrates the build-up approach.
820-10-55-12 In applying
When the discount rate adjustment technique
is applied to fixed
claims
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
other than
not fixed
receipts or paymentsclaims
, an adjustment to the cash flows
also
may be necessary to achieve comparability with the observed asset or liability from which the discount rate is derived.
> > > > Expected Present Value Technique 820-10-55-13 The expected present value technique uses as a starting point a set of cash flows that
, in theory,
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
where
with the respective probabilities
are used
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 (
as are
unlike the cash flows used in the discount rate adjustment technique).
820-10-55-14 In making an investment decision, risk-averse market participants would
consider
take into account the risk
inherent in
that the actual cash flows may differ from the expected cash flows. Portfolio theory distinguishes between two types of risk:
Unsystematic (diversifiable) risk The second is general market risk, also referred to as systematic
Systematic (nondiversifiable) risk.
820-10-55-15 Method 1 of the expected present value technique adjusts the expected cash flows
of an asset for
the
systematic (
that is, market) risk by subtracting a cash risk premium (
that is, risk-adjusted expected cash flows).
These
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
such
so that
a market participant one
is indifferent to trading a certain cash flow for an expected cash flow. For example, if
one were
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,
one
the market participant would be indifferent as to the asset held.
820-10-55-16 In contrast, Method 2 of the expected present value technique adjusts for systematic (
that is, market) risk by
adding
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
will
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 To illustrate Methods 1 and 2, assume that an asset has expected cash flows of $780 in 1 year
based
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
{remove glossary link}systematic risk{remove glossary link} premium
for an asset with the same risk profile is 3 percent.
View image
820-10-55-18 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
consider
take into account distributions of
literally
all possible cash flows using complex models and techniques
to apply the expected present value technique
. Rather, it
should
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
impacting
affecting the
reporting entity more specifically),
considering
taking into account the assumptions of market participants.
820-10-55-19 In theory, the present value (
that is, the fair value) of the asset's cash flows is the same
($722)
whether determined
under
using Method 1 or Method 2, as
follows:indicated below. Specifically:
Under
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
based on
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).
Under
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 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.
> > > Fair Value Hierarchy > > > > Level 2 Inputs 820-10-55-21 Examples of
Level 2 inputs for particular assets and liabilities include the following: a. Receive-fixed, pay-variable interest rate swap based on
a
the London Interbank Offered Rate (LIBOR)LIBOR
swap rate. A Level 2 input would
include a
be the LIBOR swap rate if that rate is observable at commonly quoted intervals for
substantially the full term of the swap. b. Receive-fixed, pay-variable interest rate swap based on a
foreigndenominated
yield curve
denominated in a foreign currency. A Level 2 input would
include
be the swap rate based on a
foreigndenominated
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. c. Receive-fixed, pay-variable interest rate swap based on a specific bank's prime rate. A Level 2 input would
include
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. d. Three-year option on exchange-traded shares. A Level 2 input would
include
be the implied volatility for the shares derived through extrapolation to Year 3 if both of the following conditions exist:1. Prices for
one-
one-year and two-year options on the shares are observable. 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-
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
one-year and two-year implied volatilities is established. e. Licensing arrangement. For a licensing arrangement that is acquired in a
{add glossary link}business combination
{add glossary link} and that was recently negotiated with an unrelated party by the acquired entity (the party to the licensing arrangement), a Level 2 input would
include
be the royalty rate
in the contract with the unrelated party at inception of the arrangement. f. Finished goods inventory at
a retail outlet. For finished goods inventory that is acquired in a business combination, a Level 2 input would
include
be either a price to customers in a retail market or a
wholesale
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
should
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. g. Building held and used. A Level 2 input would
include
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. h. Reporting unit. A Level 2 input would
include
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,
considering
taking into account operational, market, financial, and nonfinancial factors.
> > > > Level 3 Inputs 820-10-55-22 Examples of
Level 3 inputs for particular assets and liabilities include the following: Long-dated currency swap. A Level 3 input would
include
be an interest
rates
rate in a specified currency that
are
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. Three-year option on exchange-traded shares. A Level 3 input would
include
be historical volatility, that is, the volatility for the shares derived from the shares' historical prices. Historical volatility typically does not represent current market
participant
participants' expectations about future volatility, even if it is the only information available to price an option. Interest rate swap. A Level 3 input would
include
be an adjustment to a mid-market consensus (nonbinding) price for the swap developed using data that are not directly observable and
that
cannot otherwise be corroborated by observable market data. Asset retirement obligation at initial recognition. A Level 3 input would
include expected cash flows
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 (adjusted for risk) developed using the reporting entity's own data if there is no information reasonably available without undue cost and effort
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 a
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
expected cash flows
estimate of future cash outflows.
Section 410-20-55 illustrates the application of the expected present value technique to an asset retirement obligation measured at fair value at initial recognition under Subtopic 410-20.
Reporting unit. A Level 3 input would
include
be a financial forecast (for example, of cash flows or earnings) developed using the reporting entity's own data if there is no
information
reasonably available
information without undue cost and effort
that indicates that market participants would use different assumptions. 70. Supersede paragraphs 820-10-55-22A through 55-23 and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Disclosures—Valuation Techniques and Inputs
820-10-55-22A Paragraph superseded by Accounting Standards Update 2011-04.Examples of disclosures that the reporting entity may present to comply with the input disclosure requirement of paragraph 820-10-50-2(e) include the following:
[Content amended and moved to paragraph 820-10-55-103]a. Quantitative information about the inputs, for example, for certain debt securities or derivatives, information such as, but not limited to, prepayment rates, rates of estimated credit losses, interest rates (for example, LIBOR swap rate) or discount rates, and volatilities.
b. The nature of the item being measured at fair value, including the characteristics of the item being measured that are considered in the determination of relevant inputs. For example, for residential mortgage-backed securities, a reporting entity may conclude that meeting the objective of this disclosure requirement requires disclosure of items such as the following:
1. The types of underlying loans (for example, subprime or home equity lines of credit)
2. Collateral
3. Guarantees or other credit enhancements
4. Seniority level of the tranches of securities
5. The year of issuance
6. The weighted-average coupon rate of the underlying loans and the securities
7. The weighted-average maturity of the underlying loans and the securities
8. The geographical concentration of the underlying loans
9. Information about the credit ratings of the securities.
[Content amended and moved to paragraph 820-10-55-104(a)]c. How third-party information such as broker quotes, pricing services, net asset values, and relevant market data was considered in measuring fair value.
[Content amended and moved to paragraph 820-10-55-104(b)] 820-10-55-22B Paragraph superseded by Accounting Standards Update 2011-04.For example, with respect to its investment in a class of residential mortgagebacked securities, a reporting entity may disclose the following:
As of December 31, 20X1, the fair value of the entity's investments in available-for-sale Level 3 residential mortgage-backed securities was $XXX million. These securities are senior tranches in a securitization trust and have a weighted-average coupon rate of XX percent and a weighted-average maturity of XX years. The underlying loans for these securities are residential subprime mortgages that originated in California in 2006. The underlying loans have a weighted-average coupon rate of XX percent and a weighted-average maturity of XX years. These securities are currently rated below investment grade. To estimate their fair value, the entity used an industry standard valuation model, which is based on an income approach. The significant inputs for the valuation model include the following weighted averages:
a. Yield: XX percent
b. Probability of default: XX percent constant default rate
c. Loss severity: XX percent
d. Prepayment: XX percent constant prepayment rate.
> > Scope Application to Receivables
820-10-55-23 Paragraph superseded by Accounting Standards Update 2011-04.The practical expedient in paragraph 310-10-35–22 (observable market price or the fair value of collateral if the loan is collateral-dependent) is a fair value measurement. Accordingly, if that practical expedient is used, the guidance in this Subtopic shall apply.
820-10-55-23A Paragraph not used.
820-10-55-23B Paragraph not used. 71. Supersede paragraphs 820-10-55-23C through 55-23D and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > Liability Issued with an Inseparable Third-Party Credit Enhancement
820-10-55-23C Paragraph superseded by Accounting Standards Update 2011-04.Paragraph 820-10-25-1 sets out the narrow scope of certain guidance on accounting for and financial reporting of a liability issued with an inseparable third-party credit enhancement (for example, debt that is issued with a contractual third-party guarantee) when that liability is measured or disclosed at fair value on a recurring basis. That guidance does not address the accounting for a premium paid by the issuer for credit-enhanced liabilities that are not measured at fair value on a recurring basis, for example, if the issuer recognizes a credit-enhanced liability at amortized cost. However, that guidance (see paragraph 820-10-50-4A) does apply to the issuer's disclosure of fair value for that credit-enhanced liability.
820-10-55-23D Paragraph superseded by Accounting Standards Update 2011-04.For the issuer, the unit of accounting for a liability measured or disclosed at fair value does not include the third-party credit enhancement (for example, a third-party guarantee of debt). Any payments made by the guarantor under the guarantee result in a transfer of the issuer's debt obligation from the investor to the guarantor. The issuer's resulting debt obligation to the guarantor has not been guaranteed. Thus, the fair value of that obligation considers the issuer's credit standing and not the credit standing of the guarantor. For example, in determining the fair value of debt with a third-party guarantee, the issuer would consider its own credit standing and not that of the third-party guarantor.
[Content amended and moved to paragraph 820-10-35-18A] 72. Amend paragraphs 820-10-55-24 through 55-38 and related heading, with a link to transition paragraph 820-10-65-8, as follows:
> Illustrations 820-10-55-24 The following Examples
portray hypothetical situations illustrating illustrate, in qualitative terms,
the judgments
that might apply when a reporting entity
that
measures assets
and/or
and liabilities at fair value
might apply
in
varying
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.> > Example 1: The Valuation Premise—
Highest and Best Use and Valuation Premise820-10-55-25 For some assets, in particular nonfinancial assets,
Cases A through C illustrate the application of the highest-and-best-use
concept could have a significant effect on the fair value measurement. The following Cases illustrate the application of the highest-and-best- use concept in situations in which nonfinancial assets are newly acquired:
and valuation premise concepts for nonfinancial assets. a.
Subparagraph superseded by Accounting Standards Update 2011-04.Asset group (Case A)
b.
Subparagraph superseded by Accounting Standards Update 2011-04.Land (Case B)
c.
Subparagraph superseded by Accounting Standards Update 2011-04.In-process research and development project (Case C).
> > > Case A: Asset Group 820-10-55-26 The
A reporting entity
, a strategic buyer,
acquires
a group of
assets
and assumes liabilities (Assets A, B, and C)
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. as a group (highest and best use is in-use).
820-10-55-27 In this
instance
situation,
the market in which
the reporting entity would sell the assets
is
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
transact
enter into a transaction in that market have characteristics that are generally representative of both
financial
strategic buyers
(such as competitors) and
strategic
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
buyers
or financial buyers
(or both)
,
in many cases there
often
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 As discussed
in the following
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: Strategic buyer asset group. The reporting entity
, a strategic buyer,
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
standalone
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. 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 The fair values of Assets A, B, and C would be determined
based
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).
> > > Case B: Land 820-10-55-30 The
A reporting entity acquires land in a business combination. The land is currently developed for industrial use as a site for a
manufacturing facility
factory. The current use of land often is presumed to be its highest and best use
unless market or other factors suggest a different use.
However, nearby
Nearby sites have recently been developed for residential use as sites for high-rise
condominiums
apartment buildings.
Based on
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
manufacturing facility
factory could be developed as a site for residential use (
that is, for high-rise
condominiums
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 In this instance, the
The highest and best use of the land would be determined by comparing both of the following: The
fair
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)manufacturing operation, which presumes that the land would continue to be used as currently developed for industrial use (in-use)
The value of the land as a vacant site for residential use,
considering
taking into account the
costs of demolition
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 (
in-exchange
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
based
on the
basis of the higher of those values.
(In
In situations involving real estate appraisal, the determination of highest and best use
in the manner described also
might
consider other
take into account factors relating to the
manufacturing operation
factory operations, including its assets and
liabilities.)
liabilities. > > > Case C: In-Process Research and Development Project 820-10-55-32 The
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
the project is expected to provide defensive value, principally by improving the prospects for the reporting entity's own competing technology.
For purposes of measuring
To measure the fair value of the project at initial recognition, the highest and best use of the project would be determined
based
on
the basis of its use by market participants. For example: The highest and best use of the in-process research and development project would be
in-use
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 (in development or commercialized)
technology, either in development or commercialized. The fair value of the
project, measured using an in-use valuation premise,
project would be
determined
measured based
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 as a group
and that those
complementary
assets
and liabilities would be available to market participants. The highest and best use of the in-process research and development project
would be to cease developmentalso would be in-use
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
(as a locked-up project)
. 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)
if completed and the project would be expected to
provide defensive value (if locked up)
improve the prospects for their own competing technology if locked up. The fair value of the
project,
project would be measured
using an in-use valuation premise, would be determined based
on the
basis of the price that would be received in a current transaction to sell the project, assuming that the inprocess research and development would be used (
that is, locked up) with its complementary assets
and the associated liabilities as a group
and that those
complementary
assets
and liabilities would be available to market participants. The highest and best use of the in-process research and development project would be
in-exchange
to cease development if market participants would discontinue
the
its development
of the project
. That might be the case if the project is not expected to provide a market rate of return
(if completed)
if completed and would not otherwise provide defensive value (if locked up)
if locked up. The fair value of the
project, measured using an in-exchange valuation premise,
project would be
determined
measured
based
on the basis of the price that would be received in a current transaction to sell the project
standalone
on its own (which might be zero).
> > Example 2: Discount Rate Adjustment Technique—The Build-Up Approach 820-10-55-33 To illustrate a build-up approach (as discussed in paragraph 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: 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]. 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]. All three assets are comparable with respect to risk (that is, dispersion of possible payoffs and credit).
820-10-55-34 Based on
On the basis of the timing of the contractual payments to be received
relative to
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 approach. In that case, the 2-year market rate indicated by Asset C (11.2 percent) would be adjusted to a 1-year market rate
based on
using the term structure of the risk-free yield curve. Additional information and analysis
also
might be required to determine
if
whether the risk
premium
premiums for one-year and two-year assets
is
are the same. If it is determined that the risk
premium
premiums for one-year and two-year assets
is
are not the same, the two-year market rate of return would be further adjusted for that effect.
> > Example 3: Use of Multiple Valuation Techniques 820-10-55-35 Paragraph 820-10-35-28 emphasizes that valuation techniques consistent with the market approach, income approach, and/or cost approach should be used to measure fair value. Paragraph 820-10-35-24 explains that, in some cases,
This Topic notes that a single valuation technique will be appropriate
in some cases. In other cases, multiple valuation techniques will be appropriate.
Cases A and B illustrate the use of multiple valuation techniques. The following Cases illustrate the use of multiple valuation techniques:
Subparagraph superseded by Accounting Standards Update 2011-04.Machine held and used (Case A)
Subparagraph superseded by Accounting Standards Update 2011-04. Software asset (Case B).
> > > Case A: Machine Held and Used 820-10-55-36 The reporting entity tests for impairment an asset group that is held and used in operations. The asset group is impaired. The reporting entity measures the fair value of a machine that is used in the asset group as a basis for allocating the impairment loss to the assets of the group in accordance with the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.
A reporting entity acquires a machine in a business combination. The machine will be held and used in its operations. The
machine, initially
machine was originally purchased
by the acquired entity from an outside
vendor,
vendor and, before the business combination, was
subsequently
customized by the
reporting
acquired entity for use in its operations. However, the customization of the machine was not extensive. The
reporting
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 a group
(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
in-use
its current use in combination with other assets or with other assets and liabilities.
820-10-55-37 The reporting entity determines that sufficient data are available to apply the
{add glossary link}cost approach
{add glossary link} and, because the customization of the machine was not extensive, the
{add glossary link}market approach
{add glossary link}. The
{add glossary link}income approach
{add glossary link} is not used because the machine does not have a separately identifiable income stream from which to develop reliable estimates of future cash flows.
Further
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:
Market approach.
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), thereby including installation and transportation costs
use). The fair value indicated by that approach ranges from $40,000 to $48,000.
Cost approach.
The cost approach is applied by estimating the amount that
currently
would be required
currently to construct a substitute (customized) machine of comparable utility. The estimate
considers
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), (for example, physical deterioration, functional obsolescence, and economic obsolescence)
and
includes
installation costs. The fair value indicated by that approach ranges from $40,000 to $52,000.
820-10-55-38 The reporting entity determines that the
fair value
higher end of the range indicated by the market approach is
more
most representative of fair value
than the fair value indicated by the cost approach
and, therefore, ascribes more weight to the results of the market approach. That determination is
based
made on the
basis of the relative
reliability
subjectivity of the inputs,
considering
taking into account the degree of comparability between the machine and the similar machines. In particular: The inputs used in the market approach (quoted prices for similar machines) require
relatively
fewer and less subjective adjustments than the inputs used in the cost approach. The range indicated by the market approach overlaps with, but is narrower than, the range indicated by the cost approach. There are no known unexplained differences (between the machine and the similar machines) within that range.
The reporting entity further determines that the higher end of the range indicated by the market approach is most representative of fair value, largely because the majority of relevant data points in the market approach fall at or near the higher end of the range.
Accordingly, the reporting entity determines that the fair value of the machine is $48,000. 73. Add paragraph 820-10-55-38A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-55-38A 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: The cost that a market participant buyer would incur to acquire or construct a substitute machine of comparable utilityThe economic benefit that a market participant buyer would derive from the use of the machine.74. Amend paragraphs 820-10-55-39 through 55-45 and related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > > Case B: Software Asset 820-10-55-39 The
A reporting entity acquires a group of assets. The asset group includes an income-producing software asset internally developed for
license
licensing to customers and its complementary assets (including a related database with which the software asset is used)
and the associated liabilities.
For purposes of
To allocating
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)
as a group
.
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
in-use
its current use. (In this
instance
case, the licensing of the software asset, in and of itself, does not
render
indicate that the fair value of the asset would be maximized through its use by market participants on a standalone basis.) the highest and best use of the software asset inexchange.)
820-10-55-40 The reporting entity determines
that
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:
Income approach.
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.
Cost approach.
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, considering
taking into account functional, technological,
functional and economic obsolescence). The fair value indicated by that approach is $10 million.
820-10-55-41 Through its application of the cost approach, the reporting entity determines that market participants would not be able to
replicate
construct a substitute software asset of comparable utility.
Certain attributes
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.
> > Example 4: Fair Value Hierarchy—
Level 1 Principal (or Most Advantageous) Market 820-10-55-42 This
Example
4 illustrates the use of
Level 1 inputs to measure the fair value of
a financial
an asset that trades in
multiple
different {add glossary link}active markets
{add glossary link} with
at different prices.
820-10-55-43 A financial
An asset is
traded on
sold in two different
exchanges
active markets with
at different prices.
The
A reporting entity
transacts
enters into transactions in both markets and
has the ability to
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,
and
transaction costs 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
$23
$21). In Market B, the price that would be received is $25, a
nd
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
$24
$22).
820-10-55-44 If Market A is the
principal market for the asset (
that is, the market in which the reporting entity would sell the asset 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 ($26
$24).
820-10-55-45 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. The most advantageous market is the market
in which the reporting entity would sell the asset with the price
that maximizes the amount that would be received
to sell the asset afterfor the asset, considering
taking into account transaction costs
and transportation costs in the respective markets
(that is, the net amount that would be received in the respective markets).
Because the price in Market B adjusted for transaction costs would maximize the net amount that would be received for the asset ($24), the fair value of the asset would be measured using the price in that market ($25). Although transaction costs are considered in determining the most advantageous market, the price in that market used to measure the fair value of the asset is not adjusted for those costs.
[Content amended and moved to paragraph 820-10-55-45A]75. Add paragraph 820-10-55-45A, with a link to transition paragraph 820-10-65-8, as follows:
820-10-55-45A Because the
reporting entity would maximize the net amount that would be received for the asset price
in Market B
($22) adjusted for transaction costs would maximize the net amount that would be received for the asset ($24)
, 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
considered
taken into account in
when determining
which market is the most advantageous market, the price
in that market
used to measure the fair value of the asset is not adjusted for those costs
(although it is adjusted for transportation costs).
[Content amended as shown and moved from paragraph 820-10-55-45]76. Amend paragraphs 820-10-55-46 through 55-49 and related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > Example 5: Transaction Prices and Initial
Fair Value at Initial RecognitionMeasurement
—Interest Rate Swap at Initial Recognition820-10-55-46 Paragraph
This Topic (see paragraphs 820-10-30-3
through 30-3A) 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
situations in which
when the price in a transaction involving a derivative instrument might (and might not)
represent
equal the fair value of the instrument
at initial recognition.
820-10-55-47 Entity A (a retail counterparty) enters into an interest rate swap in a retail market with Entity B (a
securities
dealer) for no initial consideration (
that is, the transaction price is zero). Entity A
transacts
can access only
in
the retail market. Entity B
transacts in
can access both the retail market (that is, with retail counterparties) and
in
the
interdealer{
add glossary link}dealer market
{add glossary link} (
that is, with
securities
dealer counterparties).
820-10-55-48 From the perspective of Entity A, the retail market in which it initially
transacted is the principal market for
entered into the
swap;
swap is the principal market for the swap. if
If Entity A were to transfer its rights and obligations under the swap, it would do so with a
securities
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
(or pay)
to sell
(or transfer)
or pay to transfer the swap in a transaction with a
securities
dealer counterparty in the retail market (
that is, an
{add glossary link}exit price
{add glossary link}). That price would not be adjusted for any incremental (transaction) costs that would be charged by that
securities
dealer counterparty.
820-10-55-49 From the perspective of Entity B, the
interdealer
dealer market (not the retail market
in which it initially transacted
) is the principal market for the
swap.swap; if
If Entity B were to transfer its rights and obligations under the swap, it would do so with a
securities
dealer in that market. Because the market in which Entity B initially
transacted
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. 77. Supersede paragraph 820-10-55-50, with a link to transition paragraph 820-10-65-8, as follows:
820-10-55-50 Paragraph superseded by Accounting Standards Update 2011-04. If the transaction price represents fair value at initial recognition and a pricing model will be used to measure fair value in subsequent periods, paragraph 820-10-35-4 requires that the model be calibrated so that the model value at initial recognition equals the transaction price.
78. Amend paragraphs 820-10-55-51 through 55-57, and 820-10-55-59, and related headings, supersede paragraph 820-10-55-58, and add paragraphs 820-10-55-55A and 820-10-55-57A, with a link to transition paragraph 820-10-65-8, as follows:
> > Example 6: Restricted Assets 820-10-55-51 The following Cases illustrate (as discussed in paragraph 820-10-35-19(b)) the effect of restrictions in determining the fair value of an asset:
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. Cases A and B illustrate the effect of restrictions when measuring the fair value of an asset.Subparagraph superseded by Accounting Standards Update 2011-04.Restriction on sale of a security (Case A)
Subparagraph superseded by Accounting Standards Update 2011-04.Restrictions on the use of an asset (Case B).
> > > Case A: Restriction on the Sale of Security
an Equity Instrument 820-10-55-52 The
A reporting entity holds
a security of an issuer
an equity instrument (a financial asset) for which sale is legally
or contractually restricted for a specified period. (For example, such a restriction could limit sale to qualifying investors, as may be the case
under
in accordance with Rule 144 or similar rules of the Securities and Exchange Commission [SEC].) The restriction is
specific to (an attribute of) the security
a characteristic of the instrument and, therefore, would
be transferredtransfer
to market participants. In that case, the fair value of the
security
instrument would
be based on the
measured on the basis of the quoted price for an otherwise identical unrestricted
security
equity instrument of the same issuer that trades in a public market, adjusted to reflect the effect of the restriction. The adjustment would reflect the amount market participants would demand because of the risk relating to the inability to access a public market for the
security
instrument for the specified period. The adjustment will vary depending on all of the following: The nature and duration of the restriction The extent to which buyers are limited by the restriction (for example, there might be a large number of qualifying investors)
Factors
Qualitative and quantitative factors specific to both the
security
instrument and the issuer
(qualitative and quantitative)
.
820-10-55-53 As discussed in
section 820-10-15
paragraph 820-10-15-5,
the guidance in
this
Subtopic
Topic applies for equity securities with restrictions that
terminate
expire within one year that are measured at fair value
under
inaccordance with Subtopics 320-10 and 958-320.
> > > Case B: Restrictions on the Use of an Asset 820-10-55-54 A donor contributes land in an otherwise developed residential area to a not-for-profit neighborhood association
(Association)
. The land is currently used as a playground. The donor specifies that the land must continue to be used by the
Association
association as a playground in perpetuity. Upon review of relevant documentation (
for example, legal and other), the
Association
association determines that the fiduciary responsibility to meet the donor's restriction would not
otherwise transfer
be transferred to market participants if the
association sold the asset
was to be sold by the Association
, that is, the donor restriction on the use of the land is specific to the
Association.
association. Furthermore, the association is not restricted from selling the land. Absent
Without the restriction on the use of the land by the
Association
association, the land could be used as a site for residential development. In addition, the land
has
is subject to an easement (that is, a legal
right that enables a utility to run power lines across the land).for utility lines on a portion of the property.
Following is an analysis
of the effect on the fair value measurement of the land arising from the restriction and the easement: Donor restriction on use of land. Because in this
instance
situation the donor restriction on the use of the land is specific to the
Association
association, the restriction would not
transfer
be transferred to market participants. Therefore, the fair value of the land would be
based on
the higher of its fair value
in-use
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 or fair value in-exchange
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
association. Easement for utility lines. Because the easement for utility lines is specific to (
an attribute
that is, a characteristic of) the land, it would
transfer
be transferred to market participants
with the land. Therefore, the fair value measurement of the land would
consider
take into account the effect of the easement, regardless of whether
the highest and best use is
in-use
as a playground or
in-exchange
as a site for residential development.
820-10-55-55 The donor restriction, which is legally binding on the
Association
association, would be indicated through classification of the associated net assets (permanently restricted) and disclosure of the nature of the restriction in accordance with paragraphs 958-210-45-8 through 45-9, 958-210-50-1, and 958-210-50-3.
> > Example 7: Measuring Liabilities and Credit Risk
820-10-55-55A 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 Paragraph 820-10-35-18 explains that nonperformance
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.
That paragraph requires that the
A reporting entity
consider
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 who might
hold the
reporting entity's obligations as assets would
consider
take into account the effect of the
reporting entity's credit standing
in determining
when estimating the prices they would be willing to pay.
The following Cases illustrate these matters:
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. Subparagraph superseded by Accounting Standards Update 2011-04.Liabilities and credit risk, in general (Case A)
Subparagraph superseded by Accounting Standards Update 2011-04.Structured note (Case B).
> > > Case A: Liabilities and Credit Risk—General 820-10-55-57 This Case has the following assumptions: Entity X and Entity Y each enter into a contractual obligation to pay cash ($500) to Entity Z in 5 years. Entity X has a AA credit rating and can borrow at 6 percent,
while
and Entity Y has a BBB credit rating and can borrow at 12 percent.
Subparagraph superseded by Accounting Standards Update 2011-04.Entity X will receive about $374 in exchange for its promise (the present value of $500 in 5 years at 6 percent).
Subparagraph superseded by Accounting Standards Update 2011-04.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 (the proceeds) incorporates that entity's credit standing.
[Content amended and moved to paragraph 820-10-55-57A]820-10-55-57A 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.
[Content amended as shown and moved from paragraph 820-10-55-57]> > > Case B: Structured Note820-10-55-58 Paragraph superseded by Accounting Standards Update 2011-04.This Case illustrates the effect of credit standing on the fair value of a financial liability at initial recognition and in subsequent periods.
820-10-55-59 On January 1,
2007,
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. The fair value of the note (
that is, the obligation of Entity A) during
2007
20X7 is measured using an expected present value technique. Changes in fair value
areas
are as follows: Fair value at January 1,
2007
20X7. The expected cash flows used in the expected present value technique are discounted at the risk-free rate
(using
using the treasury yield curve at January 1,
2007)
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
the obligation of Entity A
Entity A's obligation at initial recognition
considers
takes into account nonperformance risk, including that
reporting entity's credit
risk
(presumably,
risk, which presumably is reflected in the
proceeds)
proceeds. Fair value at March 31,
2007
20X7. During March
2007,
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
using the treasury yield curve at March 31, 2
007)
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
the obligation of Entity A
Entity A's obligation changes
due to
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. Fair value at June 30,
2007
20X7. As of June 30,
2007,
20X7, there have been no changes to the AA corporate bond spreads. However,
based
on
the basis of structured note
issuances
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
using the treasury yield curve at June 30,
2007)
20X7, plus the current market observable AA corporate bond spread to treasuries (unchanged from March 31,
2007
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 due
to
as a result of the change in its own specific credit risk within the AA corporate bond spread. 79. Supersede paragraphs 820-10-55-59A through 55-59I and their related heading, with a link to transition paragraph 820-10-65-8, as follows:
> > Example 7A: Determining Fair Value When the Volume and Level of Activitiy for the Asset Have Significantly Decreased
820-10-55-59A Paragraph superseded by Accounting Standards Update 2011-04. This Example illustrates the application of paragraphs 820-10-35-51A through 35-51H in determining fair value if the volume and level of activity for an asset or a liability have significantly decreased and in identifying transactions that are not orderly. This Example has all of the following assumptions:
On January 1, 20X8 (the issuance date of the security), Entity A invested in a junior AAA-rated tranche of a residential mortgage backed security.
The junior tranche is the third most senior of a total of seven tranches.
The underlying collateral for the residential mortgage backed security is unguaranteed Alternative A (or Alt-A) nonconforming residential mortgage loans that were issued in the second half of 2006.
At March 31, 20X9 (the measurement date), the junior tranche of the residential mortgage backed security is now A-rated. This tranche of the residential mortgage backed security was previously traded through a brokered market; however, trading volume was infrequent, with only a few transactions per month from January 1, 20X8, through June 30, 20X8 and little, if any, trading activity during the nine months before March 31, 20X9.
[Content amended and moved to paragraph 820-10-55-90] 820-10-55-59B Paragraph superseded by Accounting Standards Update 2011-04.Entity A considers the guidance beginning in paragraph 820-10-35-51A to determine whether there has been a significant decrease in the volume and 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 for the junior tranche of the residential mortgage backed security have significantly decreased. Entity A supported its judgment primarily on the basis of its observation that there was little, if any, trading activity for an extended period of time before the measurement date.
[Content amended and moved to paragraph 820-10-55-91]820-10-55-59C Paragraph superseded by Accounting Standards Update 2011-04.Because there is little, if any, trading activity to support a market approach valuation technique, Entity A decides to use the discount rate adjustment technique described beginning in paragraph 820-10-55-10 to estimate fair value for its security at the measurement date. (See paragraphs 820-10-35-25 through 35-26 and 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 would not be appropriate when determining whether there has been an other-than-temporary impairment and/or a change in yield under the guidance in paragraph 325-40-35-4 when that technique uses contractual cash flows rather than most likely cash flows.
[Content amended and moved to paragraph 820-10-55-92]820-10-55-59D Paragraph superseded by Accounting Standards Update 2011-04.Entity A then estimates a discount rate (that is, the market rate of return) that will be used to discount the contractual cash flows. The available information that Entity A uses to estimate an appropriate market rate of return included both of the following:
The risk-free rate based on the rate of return on government debt securities
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.
[Content amended and moved to paragraph 820-10-55-93] 820-10-55-59E Paragraph superseded by Accounting Standards Update 2011-04.With respect to item (b) in the preceding paragraph, Entity A evaluates available market data about expected nonperformance and uncertainty risks (for example, default risk, collateral value risk, and liquidity risk) that market participants would consider in pricing the asset in an orderly transaction at the measurement date under current market conditions. In determining those adjustments, Entity A considered all of the following:
a. The credit spread for the junior tranche of the residential mortgage backed security at the issuance date implied by the original transaction price
b. The change in credit spread implied by any observed transactions from the issuance date to the measurement date for comparable residential mortgage backed securities or based on relevant indexes
c. The specific characteristics of the junior tranche of the residential mortgage backed security compared with comparable residential mortgage backed securities or indexes, including all of the following:
1. The quality of the underlying assets; that is, information about the performance of the underlying mortgage loans, such as all of the following:
i. Delinquency rates
ii. Foreclosure rates
iii. Loss experience
iv. Prepayment rates.
2. The seniority and subordination of the residential mortgage backed security tranche held
3. Other relevant factors.
d. Relevant reports issued by analysts and rating agencies
e. Quoted prices from third parties such as brokers or pricing services.
[Content amended and moved to paragraph 820-10-55-94] 820-10-55-59F Paragraph superseded by Accounting Standards Update 2011-04.Entity A estimates that one indication of an appropriate market rate of return that market participants would use in 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:
Begin with 300 basis points for the appropriate risk-free rate at March 31, 20X9.
Add 250 basis points for the credit spread over the risk-free rate at issuance of Entity A's junior tranche of the residential mortgage backed security in January 20X8.
Add 700 basis points for the estimated change in the credit spread over the risk-free rate for Entity A's junior tranche of the residential mortgage backed security between January 1, 20X8 and March 31, 20X9. This estimate was based on the change in the most comparable index available for the period between January 1, 20X8 and March 31, 20X9.
Subtract 50 basis points (net) to adjust for differences between the index used to estimate the change in credit spreads and Entity A's junior tranche of the residential mortgage backed security. The referenced index consists of subprime mortgage loans, while Entity A's residential mortgage backed security consists of Alt-A mortgage loans, making it more attractive to market participants. However, the index does not reflect an appropriate liquidity risk premium for Entity A's junior tranche of the residential mortgage backed security under current market conditions. Thus, the 50 basis point adjustment is the net of the following adjustments.
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. 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 (the cash position) when compared with the index (the synthetic position). This estimate was derived after considering liquidity risk premiums implied in recent cash transactions for a range of similar securities.
[Content amended and moved to paragraph 820-10-55-95]820-10-55-59G Paragraph superseded by Accounting Standards Update 2011-04.As an additional indication of an appropriate market rate of return, Entity A also considers 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 confirms that the quotes are not based on transactions, but it is unable to evaluate the valuation technique(s) or any other market data used to develop the quotes.
[Content amended and moved to paragraph 820-10-55-96]820-10-55-59H Paragraph superseded by Accounting Standards Update 2011-04.Because Entity A has multiple indications of the appropriate rate of return that market participants would consider relevant in estimating fair value, it evaluates and weights, as appropriate, the respective indications of the appropriate rate of return, considering the reasonableness of the range indicated by the results.
[Content amended and moved to paragraph 820-10-55-97] Entity A concludes that 13 percent is the point within the range of relevant inputs that is most representative of fair value under current market conditions. Entity A placed more weight on the 12 percent estimated market rate of return (that is, its own estimate) because of both of the following:
[Content amended and moved to paragraph 820-10-55-98]Entity A concluded that its own estimate appropriately incorporated nonperformance risk (for example, default risk and collateral value risk) and liquidity risk that market participants would use to estimate the selling price of the asset in an orderly transaction in the current market.
[Content amended and moved to paragraph 820-10-55-98]The indications of an appropriate rate of return provided by the broker quotes were nonbinding quotes that were not based on transactions. Additionally, Entity A was not able to evaluate the valuation technique(s) or significant inputs used to develop the quotes.
[Content amended and moved to paragraph 820-10-55-98] 820-10-55-59I Paragraph superseded by Accounting Standards Update 2011-04.Because changing the selected market rate of return would change the fair value of Entity A's junior tranche of the residential mortgage backed security significantly, Entity A voluntarily discloses that input and quantifies the effect of using other reasonably possible discount rate estimates.
820-10-55-59J Paragraph not used.
820-10-55-59K Paragraph not used.
820-10-55-59L Paragraph not used.
820-10-55-59M Paragraph not used. 80. Supersede paragraphs 820-10-55-60 through 55-76 and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > Example 8: Fair Value Disclosures
820-10-55-60 Paragraph superseded by Accounting Standards Update 2011-04.The disclosures required by paragraphs 820-10-50-2(a) through (d), 820-10-50-5(a) through (b), and 820-10-50-6A are illustrated by the following Cases:
[Content amended and moved to paragraph 820-10-55-99] Assets measured at fair value on a recurring basis (Case A)
[Content amended and moved to paragraph 820-10-55-99(a)]Assets measured at fair value on a recurring basis using significant unobservable inputs (Case B)
Assets measured at fair value on a nonrecurring basis (Case C)
Fair value measurements of investments in certain entities that calculate net asset value per share (or its equivalent) (Case D).
[Content moved to paragraph 820-10-55-99(d)]> > > Case A: Disclosure—Assets Measured at Fair Value on a Recurring Basis
820-10-55-61 Paragraph superseded by Accounting Standards Update 2011-04.For assets and liabilities measured at fair value on a recurring basis during the period, this Subtopic requires quantitative disclosures about the fair value measurements separately for each class of assets and liabilities (see paragraph 820-10-50-2(a) through (b)). For assets, that information might be presented as follows.
[Content amended and moved to paragraph 820-10-55-100]
View image
Paragraph 820-10-50-2(bb) requires that the reporting entity also disclose any significant transfers to or from Levels 1 and 2 and the reasons for those transfers. Transfers to or from Level 3 are disclosed in the table illustrated in Case B (see paragraphs 820-10-55-62 through 55-63).
> > > Case B: Disclosure—Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
820-10-55-62 Paragraph superseded by Accounting Standards Update 2011-04.For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, this Subtopic requires a reconciliation of the beginning and ending balances, separately for each class of assets and liabilities, except for derivative assets and liabilities, which may be presented net (see paragraph 820-10-50-2(c) through (d)). For assets, the reconciliation might be presented as follows.
[Content amended and moved to paragraph 820-10-55-101]
View image
820-10-55-63 Paragraph superseded by Accounting Standards Update 2011-04.Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the period (above) are reported in trading revenues and in other revenues as follows.
View image
[Content amended and moved to paragraph 820-10-55-102] > > > Case C: Disclosure—Assets Measured at Fair Value on a Nonrecurring Basis
820-10-55-64 Paragraph superseded by Accounting Standards Update 2011-04. For each class of assets and liabilities measured at fair value on a nonrecurring basis during the period, this Subtopic requires disclosures about the fair value measurements (see paragraph 820-10-50-5(a) through (b)). That information might be presented as follows.
View image
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification 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.
In accordance with the provisions of FASB Codification Topic 350, Intangibles—Goodwill and Other, 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.
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification 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 cost to sell of $6 million (or $20 million), resulting in a loss of $15 million, which was included in earnings for the period.
[Content amended and moved to paragraph 820-10-55-100] > > > Case D: Disclosure—Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
820-10-55-64A Paragraph superseded by Accounting Standards Update 2011-04.For investments that are within the scope of paragraphs 820-10-15-4 through 15-5 measured at fair value on a recurring or nonrecurring basis during the period, in addition to the disclosures required in paragraphs 820-10-50-1 through 50-2 and 820-10-50-5, this Subtopic requires disclosure of information that enables users to understand the nature and risk of the investments by class and whether the investments 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). 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 and risks of the reporting entity's investments.)
View image
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.
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.
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 cannot be estimated.
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.
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. It is estimated that the underlying assets of the fund will be liquidated over the next 7 to 10 years. Twenty percent of the total investment in this class is planned to be sold. 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 action process. The investee fund's management must approve of the buyer before the sale of the investments can be completed.
This class includes several private equity funds that invest primarily in foreign technology companies. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is estimated that the underlying assets of the fund would be liquidated over 5 to 8 years. However, as of December 31, 20X3, it is probable that all of the investments in this class will be sold at an amount different from the net asset value of the Company's ownership interest in partners' capital. Therefore, the fair values of the investments in this class have been estimated using recent observable transaction information for similar investments and non-binding bids received from potential buyers of the investments. As of December 31, 20X3, a buyer (or buyers) for these investments has not yet been identified. Once a buyer has been identified, the investee fund's management must approve of the buyer before the sale of the investments can be completed.
[Content amended and moved to 820-10-55-107]> > Example 9: Measuring Liabilities
820-10-55-65 Paragraph superseded by Accounting Standards Update 2011-04.The following Cases illustrate the measurement of liabilities:
Asset Retirement Obligation (Case A)
Debt Obligation: Quoted Price (Case B)
Debt Obligation: Present Value Technique (Case C).
> > > Case A: Asset Retirement Obligation
820-10-55-66 Paragraph superseded by Accounting Standards Update 2011-04.On January 1, 20X1, Entity A completes construction of and places into service an offshore oil platform. The entity is legally required to dismantle and remove the platform at the end of its useful life, which is estimated to be 10 years. According to the guidance in paragraph 410-20-25-4, the entity is required to recognize, at fair value, an asset retirement obligation.
[Content amended and moved to paragraph 820-10-55-77] 820-10-55-67 Paragraph superseded by Accounting Standards Update 2011-04.On the basis of the guidance in paragraph 410-20-30-1, Entity A uses the expected present value technique to measure the fair value of the asset retirement obligation.
[Content amended and moved to paragraph 820-10-55-78]820-10-55-68 Paragraph superseded by Accounting Standards Update 2011-04.If Entity A was contractually allowed to transfer its asset retirement obligation to a market participant, Entity A believes a market participant would use all of the following inputs, probability-weighted as appropriate, in determining the price it would expect to receive:
[Content amended and moved to paragraph 820-10-55-79] Labor costs
[Content moved to paragraph 820-10-55-79(a)] Allocation of overhead costs
[Content moved to paragraph 820-10-55-79(b)] Profit on labor and overhead costs
[Content amended and moved to paragraph 820-10-55-79(c)(1)] Effect of inflation on estimated costs and profits
[Content moved to paragraph 820-10-55-79(d)]Risk premium for bearing the uncertainty inherent in cash flows, other than inflation
Time value of money, represented by the risk-free rate
[Content moved to paragraph 820-10-55-79(e)]Nonperformance risk relating to the liability, including Entity A's own credit risk.
[Content amended and moved to paragraph 820-10-55-79(f)] 820-10-55-69 Paragraph superseded by Accounting Standards Update 2011-04.The significant assumptions used in Entity A's estimate of fair value are as follows:
[Content amended and moved to paragraph 820-10-55-80]a. Labor costs are based on current marketplace wages 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:
View image
The probability assessments are based on Entity A's experience with fulfilling obligations of this type and its knowledge of the market.
[Content amended and moved to paragraph 820-10-55-80(a)] 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.
[Content amended and moved to paragraph 820-10-55-80(b)]c. A 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 believes this rate is consistent with the rate a market participant would demand as a return for bearing the obligation.
[Content amended and moved to paragraph 820-10-55-80(c)(1)] d. Entity A assumes a rate of inflation of 4 percent over the 10-year period on the basis of available market data.
[Content moved to paragraph 820-10-55-80(d)] e. A contractor would typically demand and receive a premium (market risk premium) for bearing 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, adjusted for inflation.
[Content amended and moved to paragraph 820-10-55-80(c)(2)] f. 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. Therefore, the discount rate used to compute the present value of the cash flows is 8.5 percent.
[Content amended and moved to paragraph 820-10-55-80(e)]820-10-55-70 Paragraph superseded by Accounting Standards Update 2011-04.Entity A believes 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 estimates the fair value of its liability for the asset retirement obligation to be $194,879.
View image
[Content amended and moved to paragraph 820-10-55-81] > > > Case B: Debt Obligation: Quoted Price
820-10-55-71 Paragraph superseded by Accounting Standards Update 2011-04.On January 1, 20X1, Entity B issues at par a $2 million BBB-rated exchangetraded 5-year fixed-rate debt instrument with an annual 10 percent interest coupon. Entity B has elected to account for this instrument under the fair value option.
[Content amended and moved to paragraph 820-10-55-82]820-10-55-72 Paragraph superseded by Accounting Standards Update 2011-04.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 for 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).
[Content amended and moved to paragraph 820-10-55-83] In determining whether the quoted price for the asset in an active market represents the fair value of the liability, Entity B evaluates whether the quoted price for the asset includes the effect of factors not applicable to the fair value measurement of a liability, for example, whether the quoted price for the asset includes the effect of third-party credit enhancements. 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 as a Level 1 measurement.
[Content amended and moved to paragraph 820-10-55-84] > > > Case C: Debt Obligation: Present Value Technique
820-10-55-73 Paragraph superseded by Accounting Standards Update 2011-04.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 interest coupon. Entity C has elected to account for this instrument under the fair value option.
[Content amended and moved to paragraph 820-10-55-85]820-10-55-74 Paragraph superseded by Accounting Standards Update 2011-04.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 issuance date of the debt instrument. However, Entity C's credit spread has deteriorated by 50 basis points due to a change in its risk of nonperformance. After considering 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 issuance of the instrument.
[Content amended and moved to paragraph 820-10-55-86]820-10-55-75 Paragraph superseded by Accounting Standards Update 2011-04.For the purpose of this example, the fair value of Entity C's liability is calculated using a present value technique. Entity C believes a market participant would use all of the following inputs (consistent with paragraph 820-10-55-5) in determining the price the market participant would expect to receive to assume Entity C's obligation:
a. Terms of the debt instrument, including all of the following:
1. Coupon interest rate of 10 percent
2. Principal amount of $2 million
3. Term of 4 years.
b. Change in risk of nonperformance from the date of issuance of 50 basis points.
[Content amended and moved to paragraph 820-10-55-87]820-10-55-76 Paragraph superseded by Accounting Standards Update 2011-04.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.
[Content moved to paragraph 820-10-55-88] 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 believes the interest rate already captures the risk or profit that a market participant would require for 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.
[Content amended and moved to paragraph 820-10-55-89] 81. Add paragraphs 820-10-55-77 through 55-107 and their related headings, with a link to transition paragraph 820-10-65-8, as follows:
> > > Case C: Asset Retirement Obligation 820-10-55-77 On January 1, 20X1, Entity
A completes construction of and places into service an offshore oil platform
assumes an asset retirement obligation in a business combination. The
reporting entity is legally required to dismantle and remove
the
an offshore oil platform at the end of its useful life, which is estimated to be 10 years.
According to the guidance in paragraph 410-20-25-4, the entity is required to recognize, at fair value, an asset retirement obligation.
[Content amended as shown and moved from paragraph 820-10-55-66] 820-10-55-78 On the basis of
the guidance in
paragraph 410-20-30-1, Entity A uses the expected present value technique to measure the fair value of the asset retirement obligation.
[Content amended as shown and moved from paragraph 820-10-55-67] 820-10-55-79 If Entity A was contractually allowed to transfer its asset retirement obligation to a market participant, Entity A
believes
concludes that a market participant would use all of the following inputs, probability-weighted as appropriate,
in determining
when estimating the price it would expect to receive:
[Content amended as shown and moved from paragraph 820-10-55-68] a. Labor costs
[Content moved from paragraph 820-10-55-68(a)] b. Allocation of overhead costs
[Content moved from paragraph 820-10-55-68(b)]c.
Profit on labor and overhead costs
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. Profit on labor and overhead costs 2. The risk that the actual cash outflows might differ from those expected, excluding inflation. [Content amended as shown and moved from paragraph 820-10-55-68(c)] d. Effect of inflation on estimated costs and profits
[Content moved from paragraph 820-10-55-68(d)]f.
e. Time value of money, represented by the risk-free rate
[Content moved from paragraph 820-10-55-68(f)] g.
f. Nonperformance risk relating to the
risk that Entity A will not fulfill the obligation liability
, including Entity A's own credit risk.
[Content amended as shown and moved from paragraph 820-10-55-68(g)]820-10-55-80 The significant assumptions used in
Entity A's estimate of
by Entity A to measure fair value are as follows:
[Content amended as shown and moved from paragraph 820-10-55-69] a. Labor costs are
based on
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.
View image
The probability assessments are
developed on the basis ofbased on
Entity A's experience with fulfilling obligations of this type and its knowledge of the market.
[Content amended as shown and moved from paragraph 820-10-55-69(a)]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.
[Content moved from paragraph 820-10-55-69(b)] 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. 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
believes
concludes that this rate is consistent with the rate
that a market participant would
demand as a return for bearing the obligation
require as compensation for undertaking the activity.
[Content amended as shown and moved from paragraph 820-10-55-69(c)] 2. A contractor would typically
demand and receive a premium (market risk premium)
require compensation for the risk that the actual cash outflows might differ from those expected because of for bearing
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,
adjusted for
including the effect of inflation.
[Content amended as shown and moved from paragraph 820-10-55-69(e)] d. Entity A assumes a rate of inflation of 4 percent over the 10-year period on the basis of available market data.
[Content moved from paragraph 820-10-55-69(d)]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.
[Content amended as shown and moved from paragraph 820-10-55-69(f)] 820-10-55-81 Entity A
believes
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
estimates
measures the fair value of its liability for the asset retirement obligation
to be
as $194,879.
View image
[Content amended as shown and moved from paragraph 820-10-55-70] > > > Case D: Debt Obligation—Quoted Price 820-10-55-82 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
interest
coupon. Entity B has elected to account for this instrument
under
using the fair value option.
[Content amended as shown and moved from paragraph 820-10-55-71] 820-10-55-83 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
for
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).
[Content amended as shown and moved from paragraph 820-10-55-72]820-10-55-84 In determining whether the quoted price
for
of the asset in an active market represents the fair value of the liability, Entity B evaluates whether the quoted price
for
of the asset includes the effect of factors not applicable to the fair value measurement of a liability, for example, whether the quoted price for
of the asset includes the effect of
a third-party credit
enhancements
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
as a Level 1 measurement
within Level 1 of the fair value hierarchy.
[Content amended as shown and moved from paragraph 820-10-55-72] > > > Case E: Debt Obligation—Present Value Technique 820-10-55-85 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 i
nterest
coupon. Entity C has elected to account for this instrument
under
using the fair value option.
[Content amended as shown and moved from paragraph 820-10-55-73]820-10-55-86 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
issuance
date
of
the debt instrument
was issued. However, Entity C's credit spread has deteriorated by 50 basis points
due to
because of a change in its risk of nonperformance. After
considering
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
issuance
issue of the instrument.
[Content amended as shown and moved from paragraph 820-10-55-74]820-10-55-87 For the purpose of this example, the fair value of Entity C's liability is calculated using a present value technique. Entity C
believes
concludes that a market participant would use all of the following inputs (consistent with paragraph 820-10-55-5)
in determining
when estimating the price the market participant would expect to receive to assume Entity C's obligation: a.
Terms
The terms of the debt instrument, including all of the following: 1. Coupon
interest
rate of 10 percent 2. Principal amount of $2 million 3. Term of 4 years. b.
The market rate of interest of 10.5 percent (which includes a Change in risk of nonperformance from the date of issuance
change of 50 basis points
in the risk of nonperformance from the date of issue).
[Content amended as shown and moved from paragraph 820-10-55-75]820-10-55-88 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.
[Content moved from paragraph 820-10-55-76] 820-10-55-89 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
believes
concludes that the interest rate already captures the risk or profit that a market participant would require
for
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.
[Content amended as shown and moved from paragraph 820-10-55-76]> > Example 8: Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased820-10-55-90 This Example illustrates the
use of judgment when measuring the fair value of a financial asset 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 application of paragraphs 820-10-35-51A through 35-51H
820-10-35-54C through 35-54H.) in determining fair value if the volume and level of activity for an asset or a liability have significantly decreased and in identifying transactions that are not orderly.
This Example has all of the following assumptions:
On January 1, 20X8 (the issuance date of the security),
Entity A
invested
invests in a junior AAA-rated tranche of a residential
mortgage backed
mortgage-backed security
on January 1, 20X8 (the issue date of the security). The junior tranche is the third most senior of a total of seven tranches. The underlying collateral for the residential
mortgage backed
mortgage-backed security is unguaranteed
Alternative A (or Alt-A)
nonconforming residential mortgage loans that were issued in the second half of
2006
20X6. At March 31, 20X9 (the measurement date), the junior tranche
of the residential mortgage backed security
is now A-rated. This tranche of the residential
mortgage backed
mortgage-backed security was previously traded through a
brokered market;
brokered market. however
However, trading volume
in that market was infrequent, with only a few transactions
taking place per month from January 1, 20X8,
through
to June 30,
20X8
20X8, and little, if any, trading activity during the nine months before March 31, 20X9.
[Content amended as shown and moved from paragraph 820-10-55-59A]
820-10-55-91 Entity A
considers
takes into account the
guidance beginning
factors in paragraph
820-10-35-51A
820-10-35-54C to determine whether there has been a significant decrease in the volume
and
or level of activity for the junior tranche of the residential
mortgage backed
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
for
of the junior tranche of the residential
mortgage backed
mortgage-backed security have significantly decreased. Entity A supported its judgment primarily on the basis
of its observation
that there was little, if any, trading activity for an extended period
of time
before the measurement date.
[Content amended as shown and moved from paragraph 820-10-55-59B] 820-10-55-92 Because there is little, if any, trading activity to support a
market approach
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 to
estimate
measure the fair value
for its
of the residential mortgage-backed security at the measurement date. (See
also paragraphs 820-10-35-25 through 35-26 and
820-10-35-36
through 35-36A.) Entity A uses the contractual cash flows from the residential
mortgage backed
mortgage-backed security. The discount rate adjustment technique described beginning in paragraph 820-10-55-10 would not be appropriate when determining whether there has been an other-than-temporary impairment and/or a change in yield
under the guidance
in
accordance with paragraph 325-40-35-4 when that technique uses contractual cash flows rather than most likely cash flows.
[Content amended as shown and moved from paragraph 820-10-55-59C]820-10-55-93 Entity A then estimates a discount rate (that is,
the
a market rate of return)
that will be used
to discount
the
those contractual cash flows. The
available information that Entity A uses to estimate an appropriate
market rate of return
is estimated using included
both of the following: The risk-free rate
of interestbased on the rate of return on government debt securities
Estimated adjustments for differences between the available market data and the junior tranche of the residential
mortgage backed
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.[Content amended as shown and moved from paragraph 820-10-55-59D] 820-10-55-94 In determining those adjustments,
Entity A
considered
took into account all of
the following
information when estimating the adjustments in the preceding paragraph: a. The credit spread for the junior tranche of the residential
mortgage backed
mortgage-backed security at the
issuance
issue date
as implied by the original transaction price b. The change in credit spread implied by any observed transactions from the
issuance
issue date to the measurement date for comparable residential
mortgage backed
mortgage-backed securities,
securities or
based
on
the basis of relevant
indexes
indices c. The
specific
characteristics of the junior tranche of the residential
mortgage backed
mortgage-backed security compared with comparable residential
mortgage backed
mortgage-backed securities or
indexes
indices, including all of the following: 1. The quality of the underlying
assets;
assets, that is, information about
the performance of the underlying mortgage loans, such as
all of the following: i. Delinquency rates ii. Foreclosure rates iii. Loss experience iv. Prepayment rates. 2. The seniority
and
or subordination of the residential
mortgage backed
mortgage-backed security tranche held 3. Other relevant factors.d. Relevant reports issued by analysts and rating agencies e. Quoted prices from third parties such as brokers or pricing services.
[Content amended as shown and moved from paragraph 820-10-55-59E] 820-10-55-95 Entity A estimates that one indication of
an appropriate
the market rate of return that market participants would use
in
when pricing the junior tranche of the residential
mortgage backed
mortgage-backed security is 12 percent (1,200 basis points). This market rate of return was estimated as follows: Begin with 300 basis points for the
appropriate
relevant risk-free rate
of interest at March 31, 20X9. Add 250 basis points for the credit spread over the risk-free rate
at issuance of Entity A's
when the junior tranche
of the residential mortgage backed security
was issued in January 20X8. Add 700 basis points for the estimated change in the credit spread over the risk-free rate
for Entity A's
of the junior tranche
of the residential mortgage backed security
between January 1,
20X8
20X8, and March 31, 20X9. This estimate was
based on
developed on the basis of the change in the most comparable index available for
the
that time period
between January 1, 20X8 and March 31, 20X9
. Subtract 50 basis points (net) to adjust for differences between the index used to estimate the change in credit spreads and
Entity A's
the junior tranche
of the residential mortgage backed security
. The referenced index consists of subprime mortgage loans,
while
whereas Entity A's residential
mortgage backed
mortgage-backed security consists of
Alt-A
similar mortgage
loans,
loans with a more favorable credit profile (making it more attractive to market
participants
participants). However, the index does not reflect an appropriate liquidity risk premium for
Entity A's junior tranche of the residential mortgage backed security
the junior tranche under current market conditions. Thus, the 50 basis point adjustment is the net of
the following
two adjustments. 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
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. 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 (the
a cash position) when compared with the index (
the
a synthetic position). This estimate was derived after
considering
taking into account liquidity risk premiums implied in recent cash transactions for a range of similar securities.
[Content amended as shown and moved from paragraph 820-10-55-59F]820-10-55-96 As an additional indication of
an appropriate
the market rate of return, Entity A
also considers
takes into account 2 recent indicative quotes (that is, nonbinding quotes) provided by reputable brokers for the junior tranche of the residential
mortgage backed
mortgage-backed security that imply yields of 15 to 17 percent. Entity A
confirms that the quotes are not based on transactions, but it
is unable to evaluate the valuation technique(s) or
inputs any other market data
used to develop the quotes.
However, Entity A is able to confirm that the quotes do not reflect the results of transactions. [Content amended as shown and moved from paragraph 820-10-55-59G]820-10-55-97 Because Entity A has multiple indications of the
appropriate
market rate of return that market participants would
consider relevant in estimating
take into account when measuring fair value, it evaluates and
weights, as appropriate,
weights the respective indications of the
appropriate
rate of return, considering the reasonableness of the range indicated by the results.
[Content amended as shown and moved from paragraph 820-10-55-59H]820-10-55-98Entity A concludes that 13 percent is the point within the range of
relevant inputs
indications that is most representative of fair value under current market conditions. Entity A
placed
places more weight on the 12 percent
estimated market rate of return
indication (that is, its own estimate
of the market rate of return)
because of both of
for the following
reasons: Entity A concluded that its own estimate appropriately incorporated
nonperformance risk
the risks (for example, default
risk and
risk, collateral value risk
, and liquidity risk)
and liquidity risk
that market participants would use
when pricingto estimate the selling price of
the asset in an orderly transaction
in the
under current market
conditions.
The indications of an appropriate rate of return provided by the
The broker quotes were nonbinding
quotes that were not based on
and did not reflect the results of transactions
. Additionally,
and Entity A was
not able
unable to evaluate the valuation technique(s) or
significant
inputs used to develop the quotes.
[Content amended as shown and moved from paragraph 820-10-55-59H] > > Example 9: Fair Value Disclosures 820-10-55-99 The disclosures required by paragraphs
820-10-50-1A, 820-10-50-2(a) through
(d), 820-10-50-5(a) through (b),
(b) and (bbb) through (g), and
820-10-50-6A
, and 820-10-50-8 are illustrated by the following Cases:
[Content amended as shown and moved from paragraph 820-10-55-60] a. Assets measured at fair value
on a recurring basis
(Case A)
[Content amended as shown and moved from paragraph 820-10-55-60(a)] b.
Reconciliation of fair value measurements categorized within Level 3 of the fair value hierarchy (Case B) c.
Information about fair value measurements categorized within Level 3 of the fair value hierarchy (Case C) d. Fair value measurements of investments in certain entities that calculate net asset value per share (or its equivalent) (Case D).
[Content moved from paragraph 820-10-55-60(d)]> > > Case A: Disclosure—Assets Measured at Fair Value820-10-55-100 For assets and liabilities measured at fair value
on a recurring basis during the period
at the reporting date, this
Subtopic
Topic requires quantitative disclosures about the fair value measurements
separately
for each class of assets and liabilities
at the end of the reporting period (see paragraph 820-10-50-2(a) through (b)). For assets, that information might be presented as follows.
A reporting entity might disclose the following for assets to comply with paragraph 820-10-50-2(a) through (b). [Content amended as shown and moved from paragraph 820-10-55-61][New text in the table has not been underlined because this table is a combination of two tables from paragraphs 820-10-55-61 and 820-10-55-64. Only amended text is underlined.]
View image
[Content amended as shown and moved from paragraphs 820-10-55-61 and 820-10-55-64] > > > Case B: Disclosure—Reconciliation of Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy820-10-55-101 For
recurring fair value measurements categorized within Level 3 of the fair value hierarchyassets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period
, this
Subtopic
Topic requires a reconciliation
of the beginning and ending
from the opening balances to the closing balances, separately
balances for each class of assets and liabilities, except for derivative assets and liabilities, which may be presented net
(see paragraph 820-10-50-2(c) through (d)). For assets, the reconciliation might be presented as follows
.
A reporting entity might disclose the following for assets to comply with paragraph 820-10-50-2(c) through (d).
View image
[Content amended as shown and moved from paragraph 820-10-55-62] 820-10-55-102 Gains and losses
(realized and unrealized)
included in earnings (or changes in net assets) for the period (above) are
reported
presented in trading revenues and in other revenues as follows.
View image
[Content amended as shown and moved from paragraph 820-10-55-63]> > > Case C: Disclosure—Information about Fair Value Measurements Categorized within Level 3 of the Fair Value Hierarchy > > > > Valuation Techniques and Inputs 820-10-55-103 Examples of disclosures that the reporting entity may present
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
input disclosure
requirement
to disclose the significant unobservable inputs used in the fair value measurement in accordance with of
paragraph
820-10-50-2(e)
820-10-50-2(bbb).include the following:
[Content amended as shown and moved from paragraph 820-10-55-22A] [Note: For ease of readability, the table is not underlined as new text.]
View image
820-10-55-104 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 820-10-50-1A: b.
a. The nature of the item being measured at fair value, including the characteristics of the item being measured that are
considered
taken into account in the determination of relevant inputs. For example, for residential mortgage-backed securities, a reporting entity
might disclose may conclude that meeting the objective of this disclosure requirement requires disclosure of items such as
the following: The types of underlying loans (for example,
prime loans or subprime
or home equity lines of credit)
loans) Collateral Guarantees or other credit enhancements Seniority level of the tranches of securities The year of
issuance
issue The weighted-average coupon rate of the underlying loans and the securities The weighted-average maturity of the underlying loans and the securities The geographical concentration of the underlying loans Information about the credit ratings of the securities.
[Content amended as shown and moved from paragraph 820-10-55-22A(b)]c.
b. How third-party information such as broker quotes, pricing services, net asset values, and relevant market data was
considered in
taken into account when measuring fair value.
[Content amended as shown and moved from paragraph 820-10-55-22A(c)] > > > > Valuation Processes 820-10-55-105 For fair value measurements categorized within Level 3 of the fair value hierarchy, this Topic requires a reporting entity to disclose a description of the valuation processes used by the reporting entity. A reporting entity might disclose the following to comply with paragraph 820-10-50-2(f):a. For the group within the reporting entity that decides the reporting entity's valuation policies and procedures:Its description To whom that group reportsThe internal reporting procedures in place (for example, whether and, if so, how pricing, risk management, or audit committees discuss and assess the fair value measurements).b. The frequency and methods for calibration, back testing, and other testing procedures of pricing models.c. The process for analyzing changes in fair value measurements from period to period.d. How the reporting entity determined that third-party information, such as broker quotes or pricing services, used in the fair value measurement was developed in accordance with this Topic.e. The methods used to develop and substantiate the unobservable inputs used in a fair value measurement.> > > > Information about Sensitivity to Changes in Significant Unobservable Inputs 820-10-55-106 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 sensitivity of the fair value measurement to changes in significant unobservable inputs and a description of any interrelationships between those unobservable inputs. A reporting entity might disclose the following about its residential mortgage-backed securities to comply with paragraph 820-10-50-2(g).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 result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is 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. > > > Case D: Disclosure—Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) 820-10-55-107 For investments that are within the scope of paragraphs 820-10-15-4 through 15-5 measured at fair value
on a recurring or nonrecurring basis
during the period, in addition to the disclosures required in paragraphs 820-10-50-1 through 50-2
and 820-10-50-5
, this
Subtopic
Topic requires
a reporting entity to disclosedisclosure of
information that
enables
helps users to understand the
nature and risk
nature, characteristics, and risks of the investments by class and whether the investments 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). 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.)
[Content amended as shown and moved from paragraph 820-10-55-64A]
View image
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. 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. 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 cannot be estimated. 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. 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. It is estimated that the underlying assets of the fund will be liquidated over the next 7 to 10 years. Twenty percent of the total investment in this class is planned to be sold. 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. This class includes several private equity funds that invest primarily in foreign technology companies. These investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is estimated that the underlying assets of the fund would be liquidated over 5 to 8 years. However, as of December 31, 20X3, it is probable that all of the investments in this class will be sold at an amount different from the net asset value of the Company's ownership interest in partners' capital. Therefore, the fair values of the investments in this class have been estimated using recent observable transaction information for similar investments and non-binding bids received from potential buyers of the investments. As of December 31, 20X3, a buyer (or buyers) for these investments has not yet been identified. Once a buyer has been identified, the investee fund's management must approve of the buyer before the sale of the investments can be completed.
[Content moved from paragraph 820-10-55-64A] 82. Add paragraph 820-10-65-8 and its related heading as follows:
> Transition Related to Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs 820-10-65-8 The following represents the transition and effective date information related to Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs:a. The pending content that links to this paragraph shall be applied prospectively and is effective as follows:1. For public entities, for interim and annual periods beginning after December 15, 20112. For nonpublic entities, for annual periods beginning after December 15, 2011.b. Early application is not permitted for public entities. Early application is permitted for nonpublic entities, but only for interim periods beginning after December 15, 2011.c. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate (see the guidance beginning in paragraph 250-10-45-17).d. In the period of adoption, a reporting entity shall disclose a change, if any, in valuation technique and related inputs resulting from the application of the pending content that links to this paragraph and quantify the total effect, if practicable.