Search within this section
Select a section below and enter your search term, or to search all click Fair value measurements, global edition
Favorited Content
6.3 Long-term debt
Publication date: 31 Mar 2022
us Fair value guide
Long-term debt may be reported at amortized cost or at fair value in accordance with ASC 820. It is measured at fair value (1) when the reporting entity elects the fair value option provided by ASC 825, or (2) at the time it is assumed in a business combination.
ASC 820-10-35-16 makes clear that the fair value of debt—like all liabilities, which are addressed in FV 4.2.6—should not be based on a settlement or extinguishment value (e.g., amortized cost, adjusted for the deferred transaction costs, prepayment penalties, and premiums/discounts). Instead, measurement under ASC 820-10-35 assumes the debt will be transferred to a market counterparty with similar credit standing.
A valuation approach/technique could be one that uses the quoted price of the identical liability when traded as an asset. However, in the absence of an observable market for the transfer of a liability, which is generally the case, the fair value measurement is evaluated from the perspective of a market participant that holds the identical item as an asset at the measurement date.
If the liability isn’t traded as an asset in the same market, the reporting entity would use another approach that is consistent with the principles of ASC 820-10-35-16BB. The other valuation approaches would be an income approach or a market approach with a measurement objective based on the amount at the measurement date that the reporting entity would pay to transfer or receive to enter into an identical liability.
Further, the reporting entity is required to assess nonperformance risk and any credit enhancements (e.g., guarantees). This is further discussed in FV 8.
6.3.1 Actively-traded debt
For most actively-traded debt, there is a rebuttable presumption that material differences do not exist between a purchase in an open market and a transfer-based fair value measurement. Market participants similar to the issuing entity should be indifferent to assuming the issuer’s liability or issuing identical debt.
6.3.2 Private debt
The effort required to measure fair value will often be greater with private debt (e.g., private placement or borrowing arrangements entered into directly with a bank) than actively traded debt. Nonperformance risk (including credit risk) of the reporting entity is required to be incorporated into the fair value measurement. When measuring the fair value of private debt, a reporting entity may use prices available for its own existing public debt (or public debt of other similar reporting entities with the same credit standing), with the same key terms, as a starting point. However, it may be necessary to make adjustments for market participant assumptions about nonperformance or other risks (such as model risk).
ASC 820-10-05-1C indicate that when a price in an active market for an identical liability is not available, a reporting entity should measure fair value using a valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs.
Because pricing inputs for nonpublic debt may not be observable, nonpublic debt may often be classified as a Level 3 fair value measurement in the fair value hierarchy. For discussion of the fair value hierarchy, see FV 4.5.
6.3.3 Acquired debt
Debt assumed in a business combination is initially measured at fair value and then subsequently measured at amortized cost.
When a reporting entity with listed debt is acquired, the traded price of the debt often changes to reflect the credit enhancement expected to be provided by the acquirer (i.e., the trading price will reflect the market’s assumption that the debt will become a liability of the new group).
The credit standing of the combined entity in a business combination will often be used in determining the fair value of the acquired debt. For example, if acquired debt is expected to be credit-enhanced because the debt holders are expected to become general creditors of the combined entity, the valuation of the acquired debt would reflect the characteristics of the acquirer’s post-combination credit rating.
If the acquirer is not expected to legally add any credit enhancement to the debt or in some other way guarantee the debt (i.e., the debt will continue to be secured only by the net assets of the acquired entity), the fair value of the debt may not change.
The ASC 805 business combinations standard requires the fair value of debt to be determined as of the acquisition date. If the acquiree has public debt, the quoted price should be used. If the acquiree has both public and nonpublic debt, the price of the public debt should also be considered as one of the inputs used to value the nonpublic debt.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
