4.3 Principal Market

4.3.1 General

ASC 820-10

The Transaction

35-5 A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability
In the absence of a principal market, in the most advantageous market for the asset or liability.

35-5A A reporting entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which the reporting entity normally would enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or, in the absence of a principal market, the most advantageous market.

35-6 If there is a principal market for the asset or liability, the fair value measurement shall represent the price in that market (whether that price is directly observable or estimated using another valuation technique), even if the price in a different market is potentially more advantageous at the measurement date.

35-6A The reporting entity must have access to the principal (or most advantageous) market at the measurement date. Because different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for different entities (and businesses within those entities). Therefore, the principal (or most advantageous) market (and thus, market participants) shall be considered from the perspective of the reporting entity, thereby allowing for differences between and among entities with different activities.

Pending Content (Transition Guidance: ASC 820-10-65-13)

35-6B Although a reporting entity must be able to access the market, the reporting entity does not need to be able to sell the particular asset or transfer the particular liability on the measurement date to be able to measure fair value on the basis of the price in that market. For example, an equity security that an entity cannot sell on the measurement date because of a contractual sale restriction shall be measured at fair value on the basis of the price in the principal (or most advantageous) market. A contractual sale restriction does not change the market in which that equity security would be sold (see paragraphs 820-10-55-52 through 55-52A).

The Fair Value Measurement Approach

55-1 The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires a reporting entity to determine all of the following:

The particular asset or liability that is the subject of the measurement (consistent with its unit of account)
For a nonfinancial asset, the valuation premise that is appropriate for the measurement (consistent with its highest and best use)
The principal (or most advantageous) market for the asset or liability
The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.

To be an entity’s principal market for an in-scope crypto asset, a market must (1) have the greatest level of volume and activity for the asset and (2) be accessible to the entity. The market in which an entity transacts is presumed to be its principal market unless there is evidence to the contrary. In certain situations, it may be difficult to support using a different market than the one in which the entity normally transacts as the principal market (see Section 4.3.2).

Connecting the Dots

For more traditional markets, such as those for equities and commodities, there may be a relatively limited number of venues in which an entity can transact, and the total volume and level of activity may be concentrated in just one or two of those venues. In addition, market characteristics for those venues, such as pricing, regulatory oversight, and the general availability and reliability of information, may be fairly consistent, thus permitting a market participant to make an informed determination about the total overall transaction volume and about which one of those venues is the principal or most advantageous market. However, such consistency may not exist for crypto asset markets given their continuing rapid evolution and because it is common for crypto assets to be available at multiple venues. Further, the facts and circumstances relevant to the identification of the principal or most advantageous market for crypto assets may change over time and may differ from asset to asset as well as from entity to entity, depending on the activities in which the entity engages.

As a result of inconsistencies in the available information about market characteristics as well as differences in entities’ processes for identifying a principal market, an entity’s principal markets for various assets it holds may differ, depending on where the entity trades. For example, the principal market an entity identifies for In-Scope Crypto Asset A may differ from that for In-Scope Crypto Asset B. In addition, because a principal market must be a market that an entity has access to, different entities could identify different principal markets for the same assets. For example, two entities may both hold In-Scope Crypto Asset C but, because of access differences and other potential factors, the entities may use different principal markets when measuring C’s fair value.

4.3.2 Challenges Related to Identifying the Principal Market

Entities may find it challenging to identify the principal market because of the ongoing evolution of crypto markets as well as the difficulty of obtaining observable data in both private and public markets.

As discussed previously, when identifying the principal market, it is important to keep in mind that the market in which an entity normally transacts is presumed to be its principal market unless contradictory evidence suggests otherwise. However, an entity does not need to perform an exhaustive search for principal markets (see ASC 820-10-35-5A and paragraph BC23 of ASU 2011-04).

When determining the principal market, an entity should consider the following:

Whether the entity transacts predominantly in one market or many markets.
Whether the entity transacts in public exchanges or private exchanges.
Whether the crypto asset is traded in multiple markets and the reliability of data from those markets, such as trading volumes.
Whether the entity uses an intermediary (i.e., acting as the entity’s agent) to transact directly in various markets or enters into transactions with another entity or broker as a principal (i.e., not as an agent).

If there is no single market in which the entity normally transacts, the principal market would be the market with the greatest volume and level of activity or, in the absence of a principal market, the market that maximizes the amount the entity would be able to receive if selling the crypto asset (i.e., the most advantageous market).

When an entity transacts in both public and private exchanges, it may be difficult to overcome the presumption that the market in which the entity normally transacts is the principal market if the entity believes that another market with the greatest volume and level of activity exists or if information about the markets, such as volume or pricing, is not observable or reliable. In those situations, it may be difficult to identify the most advantageous market.

We believe that an entity should look through the intermediary and view the market in which the intermediary transacts as the market in which the entity normally transacts.

See Chapter 6 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option) and Question 16 of the AICPA Practice Aid for more information about identifying the principal or most advantageous market for fair value measurements.

4.3.3 Market Aggregator Tools

Some entities may use a market aggregator tool to retrieve and process real-time data for various assets. Such a tool may be used for, among other things, aggregation of data across multiple markets to identify price points and volume at any specific moment. A market aggregator tool is not a market; instead, it provides multiple quotes from different marketplaces. Therefore, it would be inappropriate to identify a market aggregator tool as the principal market under ASC 820 since the principal market is a single market with the greatest volume and level of activity for the asset or liability. However, an aggregator tool can be leveraged (e.g., in the determination of which markets have the greatest volume of activity) to identify the entity’s principal market if that market meets the criteria to be considered the entity’s principal market under ASC 820.

Connecting the Dots

The IRS has indicated that, for tax purposes, the use of a fair market value as reflected on a market aggregator, or within the blockchain explorer itself, would be appropriate,3 which is contrary to the principal market that should be used in accordance with U.S. GAAP (i.e., ASC 820). As a result, there could be a difference between the book basis and tax basis that companies should consider.

4.3.4 The Effect of Restrictions on Transferability, Sale, or Use on Fair Value

For crypto assets that are subject to restrictions on transferability, sale, or use, the restrictions may affect the fair value recognized by the entity depending on whether they are inherent to the crypto asset itself or specific to the entity.

The effect of a restriction on the fair value of a crypto asset is as follows:

If the restriction is specific to the entity and would not be transferred in a theoretical sale, it would not be considered part of the unit of account and would therefore not be factored into the fair value measurement of the crypto asset.
Conversely, if the restriction would be transferred with the crypto asset in a theoretical sale, it would generally be viewed as a characteristic of the crypto asset itself and would therefore be considered in determining the fair value measurement of the crypto asset.

An entity must use judgment in determining whether a restriction is a characteristic of the asset and therefore part of the unit of account.

Connecting the Dots

The FASB did not provide a different fair value measurement model for ASU 2023-08 crypto assets because it believed that other fair value guidance (ASC 820) should be applied to these assets. While ASU 2022-03 clarifies how to distinguish between entity-specific and holder-specific restrictions related to equity securities under ASC 820, the same concepts should apply to any asset with contractual sale restrictions, including crypto assets, even if those assets are not equity securities.

Footnotes

See Questions 27 and 28 of the IRS’s Frequently Asked Questions on Virtual Currency Transactions.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.