Certain accounting standards require or permit an asset or a liability to be initially recognized at fair value. ASC 820-10-30-3 states that in many cases the transaction price equals fair value, such as when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold. In determining whether a transaction price represents the fair value at initial recognition, a reporting entity should take into account factors specific to the transaction and to the asset or the liability. As discussed in ASC 820-10-30-3A, a transaction price may not represent fair value in certain situations:
  • a related party transaction;
  • a transaction under duress or a forced transaction;
  • the unit of account for the transaction price does not represent the unit of account for the asset or liability being measured; or
  • the market for the transaction is different from the market for the asset or liability being measured.

Under US GAAP, if the transaction involves one or more of the above factors, a reporting entity may determine that the transaction price does not represent the fair value of the asset or the liability at initial recognition, resulting in recognition of a Day one gain or loss.
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