ASC 820 does not prescribe a methodology for making significant adjustments to transactions or quoted prices when estimating fair value. Instead of applying a prescriptive approach, reporting entities should weight indications of fair value.

If there has been a significant decrease in the volume and level of activity for the asset or liability, it may be appropriate for the reporting entity to change its valuation technique or to apply multiple valuation techniques. For example, a reporting entity may use indications of fair value developed from both a market approach and a present value technique in its estimate of fair value. When using multiple indications of fair value, the reporting entity should consider the reasonableness of the range of fair value indications. The objective is to determine the point within that range that is most representative of fair value under current market conditions.

One approach to selecting a point within a range of indications of fair value would be to weight the multiple indications. Reporting entities are required to consider the reasonableness of the range, as noted in ASC 820-10-35-54F. A wide range of fair value measurements might indicate that further analysis is required in order to achieve the fair value measurement objective. Importantly, the fair value measurement objective remains the same regardless of the valuation techniques used, even when circumstances indicate that there has been a significant decrease in the volume and level of activity for the asset or liability.

When there has been a significant decrease in the volume or level of activity for the asset or liability, a reporting entity will need to perform additional work to evaluate observable inputs, such as quoted prices or broker quotes, to determine whether observable inputs reflect orderly transactions or whether a valuation technique reflects market participant assumptions. A reporting entity must consider price quotes when markets are not active, including those obtained from pricing services and broker quotes, provided it determines that those prices reflect orderly transactions. Further, a reporting entity is not precluded from concluding that the inputs are Level 2 in the fair value hierarchy even though a market is not active.

The reporting entity’s intention to hold an asset is not relevant in estimating fair value at the measurement date. Rather, the fair value measurement should be based on a hypothetical transaction to sell the asset or transfer the liability at the measurement date, considered from the perspective of willing market participants.

Reporting entities may make adjustments to observed prices to address the decrease in activity. It may be challenging to develop appropriate inputs to be used in the valuation techniques and to reconcile fair value measures when a significant difference exists between the use of a valuation technique and an observable price.

ASC 820-10-35-54I states that even when an entity determines that there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), it is not appropriate to conclude that all transactions in the market for the asset or liability are not orderly. Rather, a determination as to whether a transaction is orderly, and thus a relevant input into the valuation requires analysis. Refer to FV 4.6.1 for further details.

ASC 820-10-35-54I provides a list of circumstances that may indicate that a transaction is not orderly, including (but not limited to):

Although ASC 820 provides a list of factors to consider that may indicate a transaction is not orderly, we believe there is an implicit rebuttable presumption that observable transactions between unrelated parties are orderly. In our experience, such transactions are considered to be orderly in almost all instances. Therefore, the evidence necessary to conclude an observable transaction between unrelated parties is not orderly should be incontrovertible.

The determination of whether a transaction is (or is not) orderly is more difficult if there has been a significant decrease in the volume and level of activity for the asset or liability. However, ASC 820 provides guidance once the determination has been made. Specifically, ASC 820-10-35-54J provides guidance to be considered in evaluating observable transaction prices under different circumstances:

If a reporting entity does not have sufficient information to conclude whether an observed transaction is orderly (or is not orderly), it is required to consider that transaction price when estimating fair value or implied market risk premiums. In those circumstances, that transaction price may not be determinative (i.e., the sole or primary basis) for estimating fair value. There may be circumstances in which less weight should be placed on transactions in which a reporting entity has insufficient information to conclude whether the transaction is orderly when compared with other transactions that are known to be orderly.