The guidance was issued in the form of an Accounting Standards Update to Section 820 of the FASB Codification, which was formerly FAS 157 Fair Value Measurements
. ASC 820 requires that the fair value of liabilities be measured under the assumption that the liability is transferred to a market participant (that is, the liability to the counterparty is not settled, but continues). In practice, however, many liabilities contain restrictions preventing their transfer and few liabilities are transferred to another party. FASB's new guidance amends ASC 820 to permit an entity to determine the fair value of a liability by using the perspective of an investor that holds the related obligation as an asset. Therefore, the ASU clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is a 'Level 1' fair value measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more of the following valuation techniques to estimate fair value:
- A valuation technique that uses a quoted price:
- Quoted price of an identical liability when traded as an asset.
- Quoted price of a similar liability or of a similar liability when traded as an asset.
- Another valuation technique (for instance, a market approach or an income approach), including one of the following:
- A technique based on the amount an entity would pay to transfer the identical liability.
- A technique based on the amount an entity would receive to enter into an identical liability.
The new guidance is effective for the first reporting period (including interim periods) beginning after issuance. Click to download FASB Issues Guidance on Measuring Fair Value of Liabilities