ASC Guidance

Fair Value Measurements and Disclosures (ASC 820), previously known as FAS 157, was issued by the Financial Accounting Standards Board (FASB) on September 15, 2006 and amended in December 2009. Final amendments will effective for annual or interim reporting periods beginning after December 15, 2009 (with certain exceptions for Level 3 activity that will be effective after December 15, 2010). ASC 820 clarifies the definition of “fair value.” It also includes methods for determining the fair value of derivatives and hedging products by using a hierarchy of inputs, applying various acceptable valuation techniques, and determining non-performance risks. ASC 820 adds an additional layer of complexity that is unique to each entity that utilizes derivatives.

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

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ASC 820 Clients

First and foremost, ASC 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).

ASC 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.

• ASC 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.
• ASC 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.
• ASC 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 ASC 820 (formerly FAS 157), you can download an ASC 820 white paper.