ASC 820 applies when accounting pronouncements require or permit fair value measurements, measurements based on fair value (such as fair value less costs to sell), and disclosures about fair value measurements, with limited exceptions, as specified in FSP 20.
Significant accounting standards that call for the use of fair value include those in Figure FV 2-1:
Figure FV 2-1
Significant items that call for the use of fair value in accordance with ASC 820, excluding industry-specific topics
Debt and equity investments (ASC 320)
Goodwill and intangibles (ASC 350)
Property, plant, and equipment (ASC 360)
Asset retirement and environmental obligations (ASC 410)
Exit and disposal costs (ASC 420)
Guarantees (ASC 460)
Troubled debt restructurings (ASC 470-60)
Distinguishing liabilities from equity (ASC 480)
Derecognition of Nonfinancial Assets (ASC 610-20)
Employee benefits (ASC 715 and ASC 960)
Stock compensation (ASC 718)
Business combinations (ASC 805)
Derivatives (ASC 815)
Hybrid financial instruments (ASC 815-15)
Financial instruments (ASC 825)
Financial assets/liabilities eligible for fair value option (ASC 825-10)
Nonmonetary transactions (ASC 845)
Leases (ASC 842)
Transfers and servicing (ASC 860)

2.2.1 Application of fair value within ASC 840, Leases

ASC 840, Leases, did not require the use of fair value in leases for classification or measurement. Under US GAAP, examples of the application of ASC 820 to lease transactions under ASC 840 are as follows:
When applying Step 2 of the impairment test under ASC 360, the fair value of a capital lease asset should be estimated in accordance with ASC 820. It should be noted that ASC 840 includes interpretative guidance under which a lessee would record an asset subject to lease as if it were the legal owner. This can happen when a lessee is deemed the accounting owner of an asset it intends to lease upon completion of construction (i.e., a build-to-suit lease). It can also occur when real estate is subject to a sale leaseback (either directly or imputed) and contains prohibited forms of continuing involvement. In such cases, the legal form of the transaction does not alter the accounting requirement to reflect the asset as property, plant, and equipment, nor affect its required evaluation in accordance with ASC 360.
In the case of an operating lease, the lessor continues to recognize the property under lease as a long-lived asset. Therefore, the lessor should apply the guidance in ASC 360 in assessing potential impairment. If application of Step 2 of the impairment assessment is required, ASC 820 should be applied in the determination of fair value.
Under US GAAP, fair value measurements used in accounting for exit or disposal activities in accordance with ASC 420 should be determined based on the principles of ASC 820, unless the practicability exception in ASC 420 applies. Reporting entities with leases that will be terminated are required to recognize and measure exit and disposal liabilities at fair value at the time that they are incurred. For example, when a lessee terminates an operating lease, it should record a liability for the fair value of the cost of terminating the contract following the guidance for liability measurement in ASC 820. Under US GAAP, accounting for a termination of a capital lease is governed by the lease accounting guidance in ASC 840.
A reporting entity may have an exit or restructuring plan that involves ceasing use of assets under an operating lease and perhaps entering into a subleasing arrangement. Under US GAAP (ASC 420-10-30-7 through ASC 420-10-30-9), a liability should be measured at fair value when the entity ceases using the rights conveyed by the lease (the “cease-use” date). Determination of the liability’s fair value should be based on the remaining lease rentals, reduced by any actual or estimated sublease rentals that could be reasonably obtained, regardless of whether the reporting entity actually intends to enter into a sublease. ASC 420-10-35-1 indicates that the cash flows related to the lease would be discounted using a credit-adjusted, risk-free rate. The liability is measured in accordance with ASC 820, and as such, should incorporate the inputs and assumptions that would be used by market participants.
1 ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, amends ASC 320 such that it now addresses only debt securities and ASC 321 addresses equity securities. See PwC’s Loans and investments guide for information on the effective date of ASU 2016-01.
2 Upon adoption of ASC 610-20, Gains and Losses on Derecognition of Nonfinancial Assets, more transactions, such as joint venture contributions, nonmonetary exchanges, and sales of assets not to customers will be measured at fair value. ASC 610-20 is effective concurrent with ASC 606, Revenue from Contracts with Customers.
3 ASC 840, Leases, did not require the use of fair value in leases for classification or measurement. ASC 842, Leases, superseded that scope exception. Therefore, there are instances in ASC 842 that call for fair value measurements. See PwC’s Leases guide for information on ASC 842.
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