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Nonderivative financial assets, such as loans, may be recorded on the balance sheet based on a number of different models under US GAAP and IFRS. If they are reported or disclosed at fair value, the fair value standards apply.
Key concepts to consider when applying the fair value standards to nonderivative financial assets include:
  • Unit of account
    The unit of account is generally the individual instrument (e.g., a share of stock).
  • Principal or most advantageous market
    The principal market is the market with the greatest volume of activity for the asset to which the reporting entity has access. In the absence of a principal market, the reporting entity should determine the most advantageous market.
  • Valuation approach
    An income or market valuation approach should be used as appropriate. The cost method is generally not appropriate for financial assets.
  • Market participant assumptions
    The valuation should include market participant, not entity-specific, assumptions. Accordingly, no adjustment for blockage factors is permitted (see FV 4.7.1.1).
  • Bid-ask spread
    The price within the bid-ask spread that is most representative of fair value in the circumstances should be used, but there are certain practical expedients (see FV 4.2.4.3).
  • Transaction costs
    Costs to sell are generally not included in determining fair value.
Other considerations for specific nonderivative assets and liabilities are addressed in the sections that follow.
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