Topic 820 Guidance

DerivActiv has the necessary market information and sophisticated modeling techniques to assist entities in analyzing investment portfolios and preparing financial statements for compliance with Topic 820. Our methods are approved by auditors.

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Topic 820 Clients

First and foremost, Topic 820, formerly FAS 157, clarifies the definition of fair value: “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This definition replaces all previous definitions of fair value under Generally Acceptable Accounting Principles (GAAP).

Topic 820 emphasizes that fair value measurements should be based upon assumptions that would be used in pricing the asset or liability by market participants. As such it establishes a three level hierarchy of inputs to be used for measuring fair value. Level 1 inputs are quoted prices that are available in active markets for identical assets or liabilities as of the measurement date. Level 2 pricing inputs are other than quoted prices in active markets and are either directly or indirectly observable for the asset or liability as of the measurement date. Level 3 inputs are unobservable inputs used in cases where financial instruments are considered illiquid, with little or no market activity and little or no pricing information on the measurement date.

Topic 820 clarifies that fair value measurements should include assumptions about risk and thus include an adjustment for risk if market participants would use one in pricing the relevant asset or liability.

Topic 820 clarifies that fair value measurements should include assumptions about market illiquidity and thus include an adjustment for the effect of a restriction in the sale or use of an asset or liability.

Topic 820 clarifies that fair value measurements should also take nonperformance risk into consideration, which includes the impacts of an entity’s credit standing and any collateral that is posted.

If you are interested in learning more about Topic 820 (formerly FAS 157), you can download a Topic 820 white paper here.