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ASC 820-10-50-2 requires reporting entities to disclose the valuation approach and technique used by class of instrument for valuations that fall in Levels 2 and 3 of the fair value hierarchy. In certain cases, a reporting entity’s valuation policy may permit a choice among valuation techniques or approaches, or may require the use of multiple approaches and/or techniques depending on market conditions and the availability of data that maximizes the use of observable market information. For example, if a reporting entity observes a recent sale of a security that it holds (or a similar security), it may use that price as a basis for their valuation (a market approach). However, if there is not a recent transaction, the reporting entity may choose to use a discounted cash flow analysis (an income approach). If the reporting entity changes the valuation approach and/or technique, it should disclose the change for each class of instrument (not for each individual instrument). This disclosure requirement applies to both recurring and nonrecurring measurements characterized in Levels 2 and 3 of the fair value hierarchy.
Reporting entities may limit disclosure to only address changes from the established valuation policy for each class of instrument at the measurement date. They need not disclose a change in actual valuation approach or technique used if the approaches/techniques are consistent with the existing policy. In the example of an entity observing a recent sale of a security that it holds (or a similar security), no disclosure of the change in approach/technique would be required if both techniques were contemplated by the policy and disclosed.
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