ACCOUNTING PAPER – FAIR VALUE (APPLICATION TO NON-FINANCIAL ASSETS)

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Fair Value

Excerpt from FASB Accounting Standards Updates 820

DEFINITION OF FAIR VALUE
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 under the current market condition.

PRICE TO SELL:
Price to sell at the principal market or in the absence of the principal market the most advantageous market.
don’t subtract selling costs because they are transaction specific not assets or liabilities
but add transportation costs
principal market is “the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.”

A fair value measurement is for a particular asset or liability.
Therefore, the measurement should consider attributes specific to the asset or liability.
Such attributes include, for example, the following:
a. The condition and/or location of the asset or liability
b. Restrictions, if any, on the sale or use of the asset at the measurement date

Transactions
A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants
The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.

MARKET PARTICIPANTS:
assuming that market participants act in their economic best interest.
But a reporting entity need not identify specific market participants.
Rather, the reporting entity shall identify characteristics that distinguish market participants generally, considering factors specific to all of the following:
a. The asset or liability
b. The principal (or most advantageous) market for the asset or liability
c. Market participants with whom the reporting entity would enter into a transaction in that market.

APPLICATION TO NONFINANCIAL ASSETS
A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date.
 
Highest and best use is determined based on the use of the asset by market participants, even if the intended use of the asset by the reporting entity is different.
A fair value measurement of a nonfinancial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.