10.10 Additional Fair Value Measurement Considerations | DART

10.10.1 Loan Receivables

10.10.1.1 General

Some entities, such as banks, mortgage banking entities, broker-dealers, and other financial services companies, recognize loan receivables (e.g., mortgage loans) at fair value through earnings in accordance with the FVO or specialized industry accounting practices. Entities that do not measure loan receivables at fair value may be required to disclose fair value amounts (see Section 11.2.2.2).

An entity may estimate the fair value of a loan portfolio on the basis of one or more of the following approaches:

Securitization pricing.
Whole-loan pricing.
Another income approach (e.g., a present value technique).

While entities may use different methods to measure the fair value of loans, paragraph BC46(a) of ASU 2011-04 states that “[t]he objective of a fair value measurement is to measure the asset that exists at the measurement date” (emphasis added). Entities should select their valuation method on the basis of the facts and circumstances. In accordance with ASC 820, in selecting the valuation method, an entity should consider (1) its principal (or most advantageous) market (see Chapter 6) and (2) the observability of relevant inputs.14 Regardless of the valuation technique(s) used, entities should consider calibration to (1) the transaction price if the transaction price equals fair value at initial recognition (see ASC 820-10-30-3A) and (2) prices received by the entity upon subsequent sales of loans. See Section 10.3.3 for further discussion of calibration.

The sections below discuss methods that may be used to determine the fair value of loans. See also Section 10.10.19.7.

10.10.1.2 Securitization Pricing

10.10.1.2.1 General

Paragraph BC49 of ASU 2011-04 supports the use of securitization pricing and portfolio-level inputs:

The Boards decided to clarify that although there are no excess returns available from holding financial assets and financial liabilities within a portfolio (because in an efficient market, the price reflects the benefits that market participants would derive from holding the asset or liability in a diversified portfolio), a fair value measurement assumes that market participants seek to maximize the fair value of a financial or nonfinancial asset or to minimize the fair value of a financial or nonfinancial liability by acting in their economic best interest in a transaction to sell the asset or to transfer the liability in the principal (or most advantageous) market for the asset or liability. Such a transaction might involve grouping assets and liabilities in a way in which market participants would enter into a transaction, if the unit of account specified in other Topics does not prohibit that grouping. [Emphasis added]

However, as discussed in Section 10.10.1.1, the objective of a fair value measurement is to measure the asset that exists as of the measurement date. Thus, while an entity could measure the fair value of a portfolio of loans on the basis of the sales proceeds that would be received in a hypothetical securitization, the objective is to arrive at a fair value measurement of the loans in their current condition and not the securities (beneficial interests in the loans) that may be issued in the future. Accordingly, a securitization price would need to be adjusted so that the price used to measure fair value reflects the current condition of the loans.

Use of an appropriately adjusted securitization price allows an entity to evaluate all inputs available and select the most reliable inputs (e.g., risk adjustments, the margin inherent in securitization, or the cost of guarantees or servicing). It is not appropriate for an entity to determine the fair value for a portfolio of loans by using a securitization price if the entity cannot make appropriate adjustments to the securitization price with the support of sufficient data.

10.10.1.2.2 Additional Factors to Consider

As discussed in Section 10.10.1.2.1, an entity may measure the fair value of a loan portfolio on the basis of the estimated sales price of an executable securitization (i.e., securitization pricing), provided that the appropriate adjustments are made to the estimated securitization price. An entity that uses this approach to estimate the fair value of a loan portfolio is responsible for attaining relevant and reliable (i.e., observable) information to develop an appropriately adjusted securitization price.

An entity must evaluate estimated securitization prices to (1) understand whether they reflect orderly transactions in active markets for a portfolio of loans with characteristics that are identical or similar to the portfolio being valued, (2) make adjustments to account for differences between the quoted pool of loans and the portfolio of loans being valued, and (3) make other relevant adjustments as discussed below. In accordance with ASC 820, entities need to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When an entity uses a securitization price, it should understand and evaluate the source and reliability of inputs to prepare a fair value measurement for a portfolio of loans in their current form.

When using a securitization price to measure the fair value of a loan portfolio, an entity should consider the following:

The securitization market must be the entity’s principal (or most advantageous) market — ASC 820-10-35-6 states, in part, that “[i]f 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).” An entity’s principal market is the market that (1) the entity can access on the measurement date and (2) has the greatest volume or level of activity for the asset from a market participant’s perspective, which may be the securitization market. In the absence of a principal market, an entity should use the most advantageous market that it can access (in considering transaction costs, which are also further discussed below). See Chapter 6 for more information about the principal or most advantageous market.
Entities that are new to the securitization market — An entity must have access to the securitization market for the securitization market to be the principal or most advantageous market; however, an entity does not need to have loans that are actually securitized to demonstrate such access. However, loan securitization involves many complex steps in which significant legal, underwriting, and other activities must be performed. Generally, the securitizer provides credit enhancement, usually by retaining certain beneficial interests. An entity that does not regularly securitize loans will need to provide evidence that a transaction is feasible and attainable. An entity that has not previously securitized loans would generally need evidence of significant progress toward effecting an actual securitization to demonstrate access to the securitization market.
An entity needs to make appropriate adjustments when using a securitization price — Entities will need to adjust the securitization price for items that market participants would factor into the determination of fair value (because the portfolio of loans has not yet been transformed into securities). These items include the following:
- Risk adjustments, including the effect of any uncertainty related to the ultimate securitization, model risk, or other risks.
- Costs incurred to securitize the loan, whether transformation costs or transaction costs. Because the objective is to measure the portfolio of loans in their current condition, any costs related to accessing the securitization price should be incorporated into the fair value measurement of the whole-loan portfolio.
- The cost of any guarantees (or other liabilities assumed) that the entity will provide (e.g., when a guarantee is contemplated as part of the securitization price used). One example of a guarantee is an early payment default (EPD) or early prepayment provision. See Section 10.10.1.3.2 for additional information about such provisions.
- Interests in the securitization that the entity may retain at their estimated current fair value, determined in accordance with ASC 820.
- Other adjustments. According to ASC 820-10-30-3, the transaction price will often equal the exit price and therefore represents fair value at initial recognition. An entity should consider the conditions in ASC 820-10-30-3A to determine whether the fair value of a loan (or portfolio of loans) is equal to the transaction price at initial recognition. ASC 820-10-35-24C states that “[i]f the transaction price is fair value at initial recognition and a valuation technique that uses unobservable inputs will be used to measure fair value in subsequent periods [as may be the case for a valuation technique based on an appropriately adjusted securitization price], the valuation technique shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price.” Therefore, other adjustments to inputs used in a fair value measurement based on an appropriately adjusted securitization price are necessary if the fair value measurement would differ from the transaction price when the transaction price equals fair value at initial recognition. See Chapter 9 for further discussion of initial measurement.

The fair value measurement should be the price that would be received as of the measurement date; therefore, spot securitization prices should be used when available. An entity that uses forward prices should make adjustments to arrive at an estimate of the spot price on the measurement date. An appropriately adjusted securitization price would typically eliminate the margin or “gain” from the actual securitization.

Entities will need to determine a securitization price’s level within the fair value hierarchy by considering the lowest level of inputs significant to the measurement. One or more of the adjustments described above may be based on unobservable inputs. If these inputs are significant to the fair value measurement, they would cause the resulting fair value to be categorized within Level 3 of the fair value hierarchy.

10.10.1.3 Whole-Loan Pricing

10.10.1.3.1 General

In considering whether it is appropriate to measure the fair value of a portfolio of loans on the basis of whole-loan prices, an entity must consider whether:

It has access to the whole-loan market.
The whole-loan prices are identical or sufficiently similar to the loan portfolio being valued.
The whole-loan prices reflect orderly transactions in an active market.
Adjustments to observable whole-loan prices are necessary.

In evaluating whether whole-loan prices are identical or sufficiently similar to the loans being valued, an entity should consider whether it has retained or released servicing rights. Whole-loan prices may vary on the basis of whether servicing is retained or released, so an entity must ensure that it uses the correct price or make appropriate adjustments.

10.10.1.3.2 Additional Factors to Consider

Originators of certain loans (e.g., certain mortgage loans) have EPD and early prepayment agreements with purchasers (aggregators) of such whole loans. The purchaser pays a premium for these rights. These arrangements typically stipulate that if the obligor under the loan fails to make the initial payment on the loan (30 days or more past due) or prepays within a stipulated time frame (e.g., within 60 days of origination), the originator will repurchase the loan or refund the premium paid but the buyer will not incur a loss.

A portfolio of whole loans that is covered by such arrangements economically represents two elements: (1) a portfolio of whole loans and (2) short-term, contingent put (refund) rights under the EPD and early prepayment provisions. The rights under the EPD and early prepayment provisions are not characteristics of the loans since they are not part of the original loan agreements between the originator and the borrower.

These provisions are valuable to whole-loan buyers because loan sale transactions with these provisions command a higher price than those without the guarantee. The fair value of a portfolio of whole loans should not include any amounts related to the value of these provisions.

Entities will need to determine a whole-loan price’s level within the fair value hierarchy by considering the lowest level of inputs significant to the measurement. One or more adjustments to observable whole-loan prices may be based on unobservable inputs. If these inputs are significant to the fair value measurement, the resulting fair value would be categorized within Level 3 of the fair value hierarchy.

10.10.1.4 Present Value Technique

An entity that uses a discounted cash flow model would need to evaluate the reliability of inputs (e.g., prepayment and default assumptions) that are used to develop projected cash flows. In addition, the entity should evaluate the source and reliability of the information used to develop an appropriate discount rate on the basis of the risk profile, prepayment and default rates, and other characteristics of the portfolio being valued.

10.10.2 Equity Securities

Fair value measurements of investments in equity securities without readily determinable fair values will represent Level 2 or Level 3 measurements (or measurements on the basis of NAV per share). Either a market approach or an income approach will be used in such fair value measurements. In preparing such measurements, an entity may find it useful to consult the AICPA Accounting and Valuation Guide Valuation of Privately-Held-Company Equity Securities Issued as Compensation. See also Sections 9.2 and 10.10.19.3.

As discussed in Section 2.3.2.1.2, when the measurement alternative in ASC 321-10-35-2 is applied to an investment in an equity security that does not have a readily determinable fair value, the measurement adjustment that is recognized upon a remeasurement event (i.e., an impairment or observable price change in an identical or similar investment of the same issuer) represents a fair value measurement under ASC 820. An entity is also required to comply with the nonrecurring disclosure requirements in ASC 820 when such a remeasurement event occurs.

A fair value measurement used to recognize an impairment on an equity security for which the measurement alternative in ASC 321-10-35-2 is applied may be estimated on the basis of either a market approach or income approach. Entities must consider the lowest-level significant input used in the valuation technique to determine the appropriate classification of the measurement within the fair value hierarchy (see Chapter 8 for more information).

A fair value measurement used to recognize an observable price change for an equity security to which the measurement alternative in ASC 321-10-35-2 is applied will be based on either an observable transaction in an identical security or a similar investment of the same issuer. Paragraph BC112 of ASU 2019-04 addresses how to measure the fair value change under ASC 321-10-35-2 that arises from an observable price involving the identical or similar security:

The Board believed that, in most cases, the observable price change in an orderly transaction of the identical or similar investment of the same issuer would generally represent the fair value change in that investment. The Board intended a consistent remeasurement at fair value for investments accounted for under the measurement alternative upon identifying (a) an orderly transaction of the identical or similar investment of the same issuer, (b) an orderly transaction of a similar investment of the same issuer, and (c) impairment. Therefore, the Board intended to require a nonrecurring fair value measurement in accordance with Topic 820 upon the occurrence and identification of any remeasurement event described in Topic 321 for equity securities without readily determinable fair value accounted for under the measurement alternative.

If the equity investment is remeasured on the basis of the observable price change without adjustment, this nonrecurring fair value measurement would represent a Level 1 or Level 2 fair value measurement. However, if unobservable inputs are used to make significant adjustments to the observable price, the nonrecurring fair value measurement would be classified within Level 3 of the fair value hierarchy.

10.10.3 Reporting Units

10.10.3.1 General

ASC 350-20

Determining the Fair Value of a Reporting Unit

35-22 The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. However, the market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole.

35-23 Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity’s individual equity securities. An acquiring entity often is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. That control premium may cause the fair value of a reporting unit to exceed its market capitalization. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit.

35-24 In estimating the fair value of a reporting unit, a valuation technique based on multiples of earnings or revenue or a similar performance measure may be used if that technique is consistent with the objective of measuring fair value. Use of multiples of earnings or revenue in determining the fair value of a reporting unit may be appropriate, for example, when the fair value of an entity that has comparable operations and economic characteristics is observable and the relevant multiples of the comparable entity are known. Conversely, use of multiples would not be appropriate in situations in which the operations or activities of an entity for which the multiples are known are not of a comparable nature, scope, or size as the reporting unit for which fair value is being estimated.

Deferred Income Tax Considerations

35-25 Before estimating the fair value of a reporting unit, an entity shall determine whether that estimation should be based on an assumption that the reporting unit could be bought or sold in a nontaxable transaction or a taxable transaction. Making that determination is a matter of judgment that depends on the relevant facts and circumstances and must be evaluated carefully on a case-by-case basis (see Example 1 [paragraphs 350-20-55-10 through 55-23]).

35-26 In making that determination, an entity shall consider all of the following:

Whether the assumption is consistent with those that marketplace participants would incorporate into their estimates of fair value
The feasibility of the assumed structure
Whether the assumed structure results in the highest and best use and would provide maximum value to the seller for the reporting unit, including consideration of related tax implications.

35-27 In determining the feasibility of a nontaxable transaction, an entity shall consider, among other factors, both of the following:

Whether the reporting unit could be sold in a nontaxable transaction
Whether there are any income tax laws and regulations or other corporate governance requirements that could limit an entity’s ability to treat a sale of the unit as a nontaxable transaction.

10.10.3.2 Impact of Control Premium on Measuring the Fair Value of a Reporting Unit

When the fair value of a reporting unit is measured by reference to quoted market prices of that reporting unit’s individual equity securities, the presence of a control premium must be evaluated and, if deemed appropriate, factored into the fair value measurement.

The concept of a control premium is addressed in ASC 350-20-35-22 and 35-23, which state, in part:

[T]he market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole.

Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity’s individual equity securities. An acquiring entity often is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. That control premium may cause the fair value of a reporting unit to exceed its market capitalization. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit.

Under ASC 350-20-35-22 and 35-23, when measuring the fair value of a reporting unit by referring to the quoted market price of the reporting unit’s individual equity securities (price multiplied by quantity), an entity may need to adjust the measurement for a control premium. An adjustment for the control premium, if deemed applicable, lowers the fair value measurement below Level 1. ASC 820-10-55-21(h) and ASC 820-10-55-22(e) give examples of Level 2 and Level 3 inputs, respectively, for a reporting unit. In addition, if individual reporting units do not have separately traded equity securities, it would be inappropriate to allocate the per-share market value of the consolidated entity’s equity to the individual reporting units.

In a speech at the 2008 AICPA Conference on Current SEC and PCAOB Developments, Robert G. Fox III, then a professional accounting fellow in the SEC’s Office of the Chief Accountant, addressed the SEC staff’s view on determining the reasonableness of control premiums:

[T]he amount of a control premium in excess of a registrant’s market capitalization can require a great deal of judgment. Contrary to some rumors I have heard, the staff does not have “bright line” tests that we use in determining the reasonableness of a control premium. Instead, we believe that a registrant needs to carefully analyze the facts and circumstances of their particular situation when determining an appropriate control premium and that there is normally a range of reasonable judgments a registrant might reach. While it would be prudent to reconcile the combined fair value of your reporting units to your market capitalization, I believe that this should not be viewed as the only factor to consider in assessing goodwill for impairment.

See Section 10.4.3.4 for further discussion of control premiums.

10.10.3.3 Determining Fair Value When an Entity Has Only One Reporting Unit

Even if an entity has only one reporting unit, it may not be appropriate to measure the fair value of that reporting unit solely on the basis of a quoted market price in an active market. While ASC 350-20-35-22 states that “[q]uoted market prices in active markets are the best evidence of fair value,” it also notes that these market prices may not represent fair value as a whole. Therefore, in certain instances in which an entity has only one reporting unit, the current quoted market price of the entity’s publicly traded securities may not represent the entity’s fair value. For example, a market participant may be willing to pay a premium over the current market price to obtain the synergies and other benefits that control would provide (i.e., a control premium). Such a control premium is appropriate when the unit of account is the reporting unit. See Section 10.10.3.2 for discussion of the incorporation of a control premium into the fair value of a reporting unit.

10.10.3.4 Equity Value Versus Enterprise Value

ASC 350 does not require entities to use an equity value or enterprise value when calculating the fair value of a reporting unit to evaluate the unit for impairment or recognize an impairment loss. This conclusion is consistent with paragraph BC26 of ASU 2017-04, which states:

GAAP does not prescribe the valuation premise that an entity must use in the impairment test. It only mandates that the same assets and liabilities be used to determine both the carrying amount and fair value and that the methodology be consistently applied.

Further, paragraph BC4 of ASU 2010-28 states, in part:

The Task Force evaluated the different approaches used to calculate the carrying amount of reporting units. Some Task Force members thought choosing an approach for calculating the carrying amount of a reporting unit was an accounting principle choice, while others thought it was a choice of estimation methods. One Task Force member was concerned that this diversity would effectively allow a publicly traded single reporting unit to look to something other than its quoted market price as evidence of fair value. The Task Force decided to address the concerns about diversity in practice without mandating an approach for calculating the carrying amount of a reporting unit for purposes of Step 1 of the goodwill impairment test, even for entities with single reporting units. The Task Force observed that the manner in which the fair value and carrying amount of the reporting unit is determined should be consistent. [Emphasis added]

In addition, in a speech at the 2009 AICPA Conference on Current SEC and PCAOB Developments, Evan Sussholz, then a professional accounting fellow in the SEC’s Office of the Chief Accountant, discussed whether the fair value of a reporting unit refers to the unit’s equity value or enterprise value. He stated that enterprise value is “commonly defined as the sum of the fair value of debt and equity” and further indicated that the SEC staff would not expect the results of a goodwill impairment assessment to be affected if an entity uses equity value instead of enterprise value.

10.10.3.5 Changing the Method of Determining the Fair Value of a Reporting Unit

Although ASC 350-20 provides guidance on determining the fair value of a reporting unit, it does not indicate whether the same method must be used every time an entity performs the goodwill impairment test. While the method entities use to calculate the fair value of a reporting unit should generally be consistent, a different method may yield more reliable results in certain instances. For example, instead of or in addition to using a present value technique, a reporting unit that completes a public offering of its common stock may wish to measure the stock’s fair value by using a market approach in which the stock’s quoted market price is used as an input. However, entities should not change their methods to avoid recognizing, or accelerate the recording of, a goodwill impairment charge.

10.10.4 Intangible Assets

As discussed in Section 10.3.1, the three widely used valuation techniques are the market approach, cost approach, and income approach. It is generally not appropriate to use the market approach in measuring the fair value of a customer-relationship intangible asset because, in such circumstances, there may be an absence of market transactions involving identical or comparable assets. Use of the cost approach also may not be appropriate in such cases, as indicated in a speech by Chad Kokenge, then a professional accounting fellow in the SEC’s Office of the Chief Accountant, at the 2003 AICPA Conference on Current SEC Developments:

[T]he [cost] approach only focuses on the entity’s specific costs that are necessary to “establish” the relationship. Such an approach would not be sensitive to the volume of business that might be generated by the customer, other relationship aspects, such as referral capability, or other factors that may be important to how a marketplace participant might assess the asset. If these factors are significant, we believe the use of such an approach would generally be inconsistent with the . . . definition of fair value.

Accordingly, the income approach will generally be used to measure the fair value of a customer-relationship intangible asset. However, in applying the income approach, an entity should also consider the following prepared remarks made by SEC staff member Joseph Ucuzoglu at the 2006 AICPA Conference on Current SEC and PCAOB Developments:

Some have suggested that the SEC staff always requires the use of an income approach to value customer relationship intangible assets. The staff has even heard some suggest that, as long as a registrant characterizes its valuation method as an income approach, the specific assumptions used or results obtained will not be challenged by the staff, because one has complied with a perceived bright line requirement to use an income approach. Let me assure you, these statements are simply false. While an income approach often provides the most appropriate valuation of acquired customer relationship intangible assets, circumstances may certainly indicate that a different method provides a better estimate of fair value. On the flipside, even when a registrant concludes that an income approach is the most appropriate valuation methodology, the staff may nevertheless question the result obtained when the underlying assumptions, such as contributory asset charges, do not appear reasonable in light of the circumstances.

When determining the appropriate valuation of a customer relationship intangible asset, I believe that the first step in the process should be to obtain a thorough understanding of the value drivers in the acquired entity. That is, why is it that customers continually return to purchase products or services from the acquired entity? In some cases, the nature of the relationship may be such that customers are naturally “sticky,” and tend to stay with the same vendor over time without frequently reconsidering their purchasing decisions. In that circumstance, it would appear that a significant portion of the ongoing cash flows that the acquired entity will generate can be attributed to the strength of its customer relationships.

At the other end of the spectrum, relationships may be a less significant value driver in an environment where customers frequently reassess their purchasing decisions and can easily switch to another vendor with a lower price or a superior product. In that environment, if customers continually return to buy products from the acquired entity, perhaps they do so in large part due to factors other than the relationship, such as a well-know[n] tradename, strong brands, and proprietary technologies. As a result, the value of the customer relationship intangible asset may be less than would be the case in a circumstance where the relationship is stronger. However, the staff would generally expect that the amount attributed to other intangible assets would be commensurately higher, reflecting the increasingly important role of those assets in generating cash flows.

10.10.5 Internal-Use Software

ASC 350-40

Impairment

35-3 When it is no longer probable that computer software being developed will be completed and placed in service, the asset shall be reported at the lower of the carrying amount or fair value, if any, less costs to sell. The rebuttable presumption is that such uncompleted software has a fair value of zero. Indications that the software may no longer be expected to be completed and placed in service include the following:

A lack of expenditures budgeted or incurred for the project.
Programming difficulties that cannot be resolved on a timely basis.
Significant cost overruns.
Information has been obtained indicating that the costs of internally developed software will significantly exceed the cost of comparable third-party software or software products, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
Technologies are introduced in the marketplace, so that management intends to obtain the third-party software or software products instead of completing the internally developed software.
Business segment or unit to which the software relates is unprofitable or has been or will be discontinued.

If an entity ceases development of software and there is reliable evidence that the project can be marketed in its present state, the related capitalized cost balance should be reported in accordance with ASC 360-10-35 at the lower of the carrying amount or fair value less costs to sell. In all cases, as noted in ASC 350-40-35-3, there is a rebuttable presumption that an uncompleted software project “has a fair value of zero.”

If an entity continues development because it has decided to market the software to others, the entity should apply the guidance in ASC 985-20, regardless of whether it is probable that the software will be completed and placed in service by the entity itself. ASC 350-40-35-9 requires that the carrying amount be evaluated as of each balance sheet date in accordance with ASC 985-20-35-4.

10.10.6 Property, Plant, and Equipment

ASC 360-10

Fair Value

35-36 For long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value technique will often be the appropriate technique with which to estimate fair value.

Measurement of Expected Disposal Loss or Gain

35-38 Costs to sell are the incremental direct costs to transact a sale, that is, the costs that result directly from and are essential to a sale transaction and that would not have been incurred by the entity had the decision to sell not been made. Those costs include broker commissions, legal and title transfer fees, and closing costs that must be incurred before legal title can be transferred. Those costs exclude expected future losses associated with the operations of a long-lived asset (disposal group) while it is classified as held for sale. Expected future operating losses that marketplace participants would not similarly consider in their estimates of the fair value less cost to sell of a long-lived asset (disposal group) classified as held for sale shall not be indirectly recognized as part of an expected loss on the sale by reducing the carrying amount of the asset (disposal group) to an amount less than its current fair value less cost to sell. If the sale is expected to occur beyond one year as permitted in limited situations by paragraph 360-10-45-11, the cost to sell shall be discounted.

Long-Lived Assets to Be Abandoned

35-48 Because the continued use of a long-lived asset demonstrates the presence of service potential, only in unusual situations would the fair value of a long-lived asset to be abandoned be zero while it is being used. When a long-lived asset ceases to be used, the carrying amount of the asset should equal its salvage value, if any. The salvage value of the asset shall not be reduced to an amount less than zero.

Management Expects to Sell Asset and Remediation Costs Not Required

55-11 Management expects to sell the asset in the future, and the asset’s sale will not require the environmental remediation costs to be incurred. (Although the environmental remediation costs are excluded from this Subtopic’s recoverability test, the fair value of the asset is likely to be affected by the existence of those costs. The diminished fair value shall be considered in estimating the cash flows expected to arise from the eventual sale of the asset.)

Example 2: Probability-Weighted Cash Flows

Case B: Expected Cash Flows Technique

55-30 This Case illustrates the application of an expected present value technique to estimate the fair value of a long-lived asset in an impairment situation.

55-31 The following table shows by year the computation of the expected cash flows used in the measurement. They reflect the possible cash flows (probability-weighted) used to test the manufacturing facility for recoverability in Case A, adjusted for relevant marketplace assumptions, which increases the possible cash flows in total by approximately 15 percent.

55-32 The following table shows the computation of the expected present value; that is, the sum of the present values of the expected cash flows by year, each discounted at a risk-free interest rate determined from the yield curve for U.S. Treasury instruments. In this Case, a market risk premium is included in the expected cash flows; that is, the cash flows are certainty equivalent cash flows. As shown, the expected present value is $42.3 million, which is less than the carrying amount of $48 million. In accordance with paragraph 360-10-35-17 the entity would recognize an impairment loss of $5.7 million.

See Section 2.3.7 for more information about the testing of long-lived assets for impairment.

10.10.7 Asset Retirement and Environmental Obligations

ASC 410-20

Fair Value Is Reasonably Estimated

25-6 An entity shall identify all its asset retirement obligations. An entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation if any of the following conditions exist:

It is evident that the fair value of the obligation is embodied in the acquisition price of the asset.
An active market exists for the transfer of the obligation.
Sufficient information exists to apply an expected present value technique.

Obligations With Uncertainty in Timing or Method of Settlement

25-7 The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity shall recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. In some cases, sufficient information about the timing and (or) method of settlement may not be available to reasonably estimate fair value. An expected present value technique incorporates uncertainty about the timing and method of settlement into the fair value measurement. Uncertainty is factored into the measurement of the fair value of the liability through assignment of probabilities to cash flows.

25-8 An entity would have sufficient information to apply an expected present value technique and therefore an asset retirement obligation would be reasonably estimable if either of the following conditions exists:

The settlement date and method of settlement for the obligation have been specified by others. For example, the law, regulation, or contract that gives rise to the legal obligation specifies the settlement date and method of settlement. In this situation, the settlement date and method of settlement are known and therefore the only uncertainty is whether the obligation will be enforced (that is, whether performance will be required). In certain cases, determining the settlement date for the obligation that has been specified by others is a matter of judgment that depends on the relevant facts and circumstances. For example, a contract that provides the entity with an ability to extend its term through renewal should be evaluated to determine whether the settlement date should take into consideration renewal periods. Uncertainty about whether performance will be required does not defer the recognition of an asset retirement obligation because a legal obligation to stand ready to perform the retirement activities still exists, and it does not prevent the determination of a reasonable estimate of fair value because the only uncertainty is whether performance will be required.
The information is available to reasonably estimate all of the following:
1. The settlement date or the range of potential settlement dates
2. The method of settlement or potential methods of settlement (The term potential methods of settlement refers to methods of settling the obligation that are currently available to the entity. Therefore, uncertainty about future methods yet to be developed would not prevent the entity from estimating the fair value of the asset retirement obligation.)
3. The probabilities associated with the potential settlement dates and potential methods of settlement. (The entity should have a reasonable basis for assigning probabilities to the potential settlement dates and potential methods of settlement to reasonably estimate the fair value of the asset retirement obligation. If the entity does not have a reasonable basis of assigning probabilities, it is expected that the entity would still be able to reasonably estimate fair value when the range of time over which the entity may settle the obligation is so narrow and (or) the cash flows associated with each potential method of settlement are so similar that assigning probabilities without having a reasonable basis for doing so would not have a material impact on the fair value of the asset retirement obligation.)

25-9 In many cases, the determination as to whether the entity has the information to reasonably estimate the fair value of the asset retirement obligation is a matter of judgment that depends on the relevant facts and circumstances. It is expected that the narrower the range of time over which the entity may settle the obligation and the fewer potential methods of settlement the entity has available to it, the more likely it is that the entity will have the information to reasonably estimate the fair value of an asset retirement obligation. For an illustration of this guidance, see Example 3 (paragraph 410-20-55-47).

25-10 Instances may occur in which sufficient information to estimate the fair value of an asset retirement obligation is unavailable. For example, if an asset has an indeterminate useful life, sufficient information to estimate a range of potential settlement dates for the obligation might not be available. In such cases, the liability would be initially recognized in the period in which sufficient information exists to estimate a range of potential settlement dates that is needed to employ a present value technique to estimate fair value.

25-11 Examples of information that is expected to provide a basis for estimating the potential settlement dates, potential methods of settlement, and the associated probabilities include, but are not limited to, information that is derived from the entity’s past practice, industry practice, management’s intent, or the asset’s estimated economic life. The estimated economic life of the asset might indicate a potential settlement date for the asset retirement obligation. However, the original estimated economic life of the asset may not, in and of itself, establish that date because the entity may intend to make improvements to the asset that could extend the life of the asset or the entity could defer settlement of the obligation beyond the economic life of the asset. In those situations, the entity would look beyond the economic life of the asset in determining the settlement date or range of potential settlement dates to use when estimating the fair value of the asset retirement obligation.

Uncertainty in Performance Obligations

25-15 An unambiguous requirement that gives rise to an asset retirement obligation coupled with a low likelihood of required performance still requires recognition of a liability. Uncertainty about the conditional outcome of the obligation is incorporated into the measurement of the fair value of that liability, not the recognition decision. Uncertainty about performance of conditional obligations shall not prevent the determination of a reasonable estimate of fair value. A past history of nonenforcement of an unambiguous obligation does not defer recognition of a liability, but its measurement is affected by the uncertainty over the requirement to perform retirement activities.

Determination of a Reasonable Estimate of Fair Value

30-1 An expected present value technique will usually be the only appropriate technique with which to estimate the fair value of a liability for an asset retirement obligation. An entity, when using that technique, shall discount the expected cash flows using a credit-adjusted risk-free rate. Thus, the effect of an entity’s credit standing is reflected in the discount rate rather than in the expected cash flows. Proper application of a discount rate adjustment technique entails analysis of at least two liabilities — the liability that exists in the marketplace and has an observable interest rate and the liability being measured. The appropriate rate of interest for the cash flows being measured shall be inferred from the observable rate of interest of some other liability, and to draw that inference the characteristics of the cash flows shall be similar to those of the liability being measured. Rarely, if ever, would there be an observable rate of interest for a liability that has cash flows similar to an asset retirement obligation being measured. In addition, an asset retirement obligation usually will have uncertainties in both timing and amount. In that circumstance, employing a discount rate adjustment technique, where uncertainty is incorporated into the rate, will be difficult, if not impossible. See paragraphs 410-20-55-13 through 55-17 and Example 2 (paragraph 410-20-55-35). For further information on present value techniques, see the guidance beginning in paragraph 820-10-55-4.

Allocation of Asset Retirement Cost

35-6 The subsequent measurement provisions require an entity to identify undiscounted estimated cash flows associated with the initial measurement of a liability. Therefore, an entity that obtains an initial measurement of fair value from a market price or from a technique other than an expected present value technique must determine the undiscounted cash flows and estimated timing of those cash flows that are embodied in that fair value amount for purposes of applying the subsequent measurement provisions. Example 1 (see paragraph 410-20-55-31) provides an illustration of the subsequent measurement of a liability that is initially obtained from a market price. (See paragraph 410-20-25-14 for a discussion on conditional outcomes.)

35-7 Paragraph 410-20-25-14 explains how uncertainty surrounding conditional performance of a retirement obligation is factored into its measurement by assessing the likelihood that performance will be required. As the time for notification approaches, more information and a better perspective about the ultimate outcome will likely be obtained. Consequently, reassessment of the timing, amount, and probabilities associated with the expected cash flows may change the amount of the liability recognized. See paragraphs 410-20-55-18 through 55-19.

Components of a Larger System

55-11 If assets with asset retirement obligations are components of a larger group of assets (for example, a number of oil wells that make up an entire oil field operation), aggregation techniques may be necessary to derive a collective asset retirement obligation. This Subtopic does not preclude the use of estimates and computational shortcuts that are consistent with the fair value measurement objective when computing an aggregate asset retirement obligation for assets that are components of a larger group of assets. This implementation guidance illustrates paragraph 410-20-30-1.

Obligations With Uncertainty About Government Enforcement

55-12 This implementation guidance illustrates Section 410-20-15. If, for example, a governmental unit retains the right (an option) to decide whether to require a retirement activity, there is some uncertainty about whether those retirement activities will be required or waived. Regardless of the uncertainty attributable to the option, a legal obligation to stand ready to perform retirement activities still exists, and the governmental unit might require them to be performed. Although the timing and method of settlement of the retirement obligation may depend on future events that may or may not be within the control of the entity, a legal obligation to stand ready to perform retirement activities still exists. The entity should consider the uncertainty about the timing and method of settlement in the measurement of the liability, consistent with a fair value measurement objective, regardless of whether the event that will trigger the settlement is partially or wholly under the control of the entity.

Expected Present Value Technique

55-13 This implementation guidance illustrates paragraph 410-20-30-1. In estimating the fair value of a liability for an asset retirement obligation using an expected present value technique, an entity shall begin by estimating the expected cash flows that reflect, to the extent possible, a marketplace assessment of the cost and timing of performing the required retirement activities. Considerations in estimating those expected cash flows include developing and incorporating explicit assumptions, to the extent possible, about all of the following:

The costs that a third party would incur in performing the tasks necessary to retire the asset
Other amounts that a third party would include in determining the price of the transfer, including, for example, inflation, overhead, equipment charges, profit margin, and advances in technology
The extent to which the amount of a third party’s costs or the timing of its costs would vary under different future scenarios and the relative probabilities of those scenarios
The price that a third party would demand and could expect to receive for bearing the uncertainties and unforeseeable circumstances inherent in the obligation, sometimes referred to as a market-risk premium.

55-14 It is expected that uncertainties about the amount and timing of future cash flows can be accommodated by using the expected present value technique and therefore will not prevent the determination of a reasonable estimate of fair value.

Credit-Adjusted Risk-Free Rate

55-15 This implementation guidance illustrates paragraph 410-20-30-1. An entity shall discount expected cash flows using an interest rate that equates to a risk-free interest rate adjusted for the effect of its credit standing (a credit-adjusted risk-free rate). In determining the adjustment for the effect of its credit standing, an entity should consider the effects of all terms, collateral, and existing guarantees on the fair value of the liability.

55-16 Adjustments for default risk can be reflected in either the discount rate or the expected cash flows. In most situations, an entity will know the adjustment required to the risk-free interest rate to reflect its credit standing. Consequently, it would be easier and less complex to reflect that adjustment in the discount rate.

55-17 In addition, because of the requirements in paragraph 410-20-35-8 relating to upward and downward adjustments in expected cash flows, it is essential to the operationality of this Subtopic that the credit standing of the entity be reflected in the discount rate. For those reasons, the risk-free rate shall be adjusted for the credit standing of the entity to determine the discount rate.

Historical Waste on Electrical and Electronic Equipment Associated With EU Directive 2002/96/EC

55-27 If the asset is subsequently replaced, with the obligation being transferred to the producer of the replacement equipment, the commercial user should determine the portion of the total amount paid to the producer that relates to the replacement equipment (the new asset) and the portion that relates to the transfer of the asset retirement obligation. That determination should be based on the fair value of the asset retirement obligation, without the sale of the new asset. The price paid by the commercial user would not include any costs associated with the transfer of the obligation in situations in which the law in the EU-member country obligates commercial users to pay all of the costs associated with the historical waste even if the equipment is replaced. In those situations, the commercial user would not derecognize the liability from its balance sheet upon replacement, but rather when the obligation is ultimately settled.

ASC 410-20-55-31 through 55-67 contain several examples illustrating fair value estimates. See Section 10.2.7.5 for an example from ASC 820 that illustrates the application of the guidance in ASC 420-10 to an ARO liability. For further discussion of fair value estimates related to AROs, see Deloitte’s Roadmap Environmental Obligations and Asset Retirement Obligations.

10.10.8 Exit or Disposal Cost Obligations

10.10.8.1 General

ASC 420-10

Fair Value

30-1 A liability for a cost associated with an exit or disposal activity shall be measured initially at its fair value in the period in which the liability is incurred, except as indicated in paragraphs 420-10-30-4 and 420-10-30-6 (for a liability for one-time termination benefits that is incurred over time).

30-2 Quoted market prices are the best representation of fair value. However, for many of the liabilities covered by this Subtopic, quoted market prices will not be available. Consequently, in those circumstances, fair value will be estimated using some other valuation technique. A present value technique is often the best available valuation technique with which to estimate the fair value of a liability for a cost associated with an exit or disposal activity. For a liability that has uncertainties both in timing and amount, an expected present value technique generally will be the appropriate technique.

30-3 In some situations, a fair value measurement for a liability associated with an exit or disposal activity obtained using a valuation technique other than a present value technique may not be materially different from a fair value measurement obtained using a present value technique. In those situations, this Subtopic does not preclude the use of estimates and computational shortcuts that are consistent with a fair value measurement objective.

Example 1: One-Time Employee Termination Benefits — No Future Service Required

55-2 This Example assumes that an entity has a one-time benefit arrangement established by a plan of termination that meets the criteria in paragraph 420-10-25-4 and has been communicated to employees.

55-3 An entity plans to cease operations in a particular location and determines that it no longer needs the 100 employees that currently work in that location. The entity notifies the employees that they will be terminated in 90 days. Each employee will receive as a termination benefit a cash payment of $6,000, which will be paid at the date an employee ceases rendering service during the 90-day period. In accordance with paragraph 420-10-25-8, a liability would be recognized at the communication date and, in accordance with paragraph 420-10-30-5, measured at its fair value. In this case, because of the short discount period, $600,000 may not be materially different from the fair value of the liability at the communication date.

Example 2: One-Time Employee Termination Benefits — Stay Bonus-Future Service Required

55-4 This Example assumes that an entity has a one-time benefit arrangement established by a plan of termination that meets the criteria in paragraph 420-10-25-4 and has been communicated to employees.

55-5 An entity plans to shut down a manufacturing facility in 16 months and, at that time, terminate all of the remaining employees at the facility. To induce employees to stay until the facility is shut down, the entity establishes a one-time stay bonus arrangement. Each employee that stays and renders service for the full 16-month period will receive as a termination benefit a cash payment of $10,000, which will be paid 6 months after the termination date. An employee that leaves voluntarily before the facility is shut down will not be entitled to receive any portion of the termination benefit. In accordance with paragraph 420-10-25-9, a liability for the termination benefits would be measured initially at the communication date and, in accordance with paragraph 420-10-30-6, based on the fair value of the liability as of the termination date and recognized ratably over the future service period. The fair value of the liability as of the termination date would be adjusted cumulatively for changes resulting from revisions to estimated cash flows over the future service period, measured using the credit-adjusted risk-free rate that was used to measure the liability initially (as illustrated in this Example).

55-6 The fair value of the liability as of the termination date is $962,240, estimated at the communication date using an expected present value technique. The expected cash flows of $1 million (to be paid 6 months after the termination date), which consider the likelihood that some employees will leave voluntarily before the facility is shut down, are discounted for 6 months at the credit-adjusted risk-free rate of 8 percent. In this case, a risk premium is not considered in the present value measurement. Because the amounts of the cash flows will be fixed and certain as of the termination date, marketplace participants would not demand a risk premium.

55-7 Therefore, a liability of $60,140 would be recognized in each month during the future service period (16 months).

55-8 After eight months, more employees than originally estimated leave voluntarily. The entity adjusts the fair value of the liability as of the termination date to $769,792 to reflect the revised expected cash flows of $800,000 (to be paid 6 months after the termination date), discounted for 6 months at the credit-adjusted risk-free rate that was used to measure the liability initially (8 percent). Based on that revised estimate, a liability (expense) of $48,112 would have been recognized in each month during the future service period. Thus, the liability recognized to date of $481,120 ($60,140 × 8) would be reduced to $384,896 ($48,112 × 8) to reflect the cumulative effect of that change (of $96,224). A liability of $48,112 would be recognized in each month during the remaining future service period (8 months). Accretion expense would be recognized after the termination date in accordance with the guidance beginning in paragraph 420-10-35-1 and in paragraph 420-10-45-5.

Example 3: One-Time Employee Termination Benefits — Voluntary and Involuntary Benefits Offered

55-9 This Example assumes that an entity has a one-time benefit arrangement established by a plan of termination that meets the criteria of paragraph 420-10-25-4 and has been communicated to employees.

55-10 An entity initiates changes to streamline operations in a particular location and determines that, as a result, it no longer needs 100 of the employees that currently work in that location. The plan of termination provides for both voluntary and involuntary termination benefits (in the form of cash payments). Specifically, the entity offers each employee (up to 100 employees) that voluntarily terminates within 30 days a voluntary termination benefit of $10,000 to be paid at the separation date. Each employee that is involuntarily terminated thereafter (to reach the target of 100) will receive an involuntary termination benefit of $6,000 to be paid at the termination date. The entity expects all 100 employees to leave (voluntarily or involuntarily) within the minimum retention period. In accordance with paragraphs 420-10-25-6 through 25-8, a liability for the involuntary termination benefit (of $6,000 per employee) would be recognized at the communication date and, in accordance with paragraphs 420-10-30-4 through 30-6, measured at its fair value. In this case, because of the short discount period, $600,000 may not be materially different from the fair value of the liability at the communication date. As noted in paragraph 420-10-25-10, a liability for the incremental voluntary termination benefit (of $4,000 per employee) would be recognized in accordance with paragraph 712-10-25-1 through 25-3 (that is, when employees accept the offer).

10.10.9 Guarantees

ASC 460-10

Fair Value Objective

30-2 Except as indicated in paragraphs 460-10-30-3 through 30-5, the objective of the initial measurement of a guarantee liability is the fair value of the guarantee at its inception. For example:

If a guarantee is issued in a standalone arm’s-length transaction with an unrelated party, the liability recognized at the inception of the guarantee shall be the premium received or receivable by the guarantor as a practical expedient.
If a guarantee is issued as part of a transaction with multiple elements with an unrelated party (such as in conjunction with selling an asset), the liability recognized at the inception of the guarantee should be an estimate of the guarantee’s fair value. In that circumstance, a guarantor shall consider what premium would be required by the guarantor to issue the same guarantee in a standalone arm’s-length transaction with an unrelated party as a practical expedient.
If a guarantee is issued as a contribution to an unrelated party, the liability recognized at the inception of the guarantee shall be measured at its fair value, consistent with the requirement to measure the contribution made at fair value, as prescribed in Section 720-25-30. For related implementation guidance, see paragraph 460-10-55-14.

Probable Contingent Losses for Which the Amount of Loss Can Be Reasonably Estimated

30-4 For many guarantors, it would be unusual at the inception of the guarantee for the contingent liability amount under (b) in the preceding paragraph to exceed the amount that satisfies the fair value objective under (a) in the preceding paragraph. An example of that unusual circumstance is a guarantee for which, at inception, there is a high (probable) likelihood that the guarantor will be required to pay the maximum potential settlement at the end of the six-month term and a low likelihood that the guarantor will not be required to make any payment at the end of the six-month term. The amount that satisfies the fair value objective would include consideration of the low likelihood that no payment will be required, but the accrual of the contingent loss under Section 450-20-30 would be based solely on the best estimate of the settlement amount whose payment is probable (the maximum potential settlement amount in this case). This example is considered to be an unusual circumstance because of the high likelihood at inception that the maximum potential settlement amount will be paid, resulting in a substantial initial fair value for that guarantee. Another example in which the contingent liability amount required to be recognized under (b) in the preceding paragraph exceeds the fair value at inception under (a) in the preceding paragraph would involve an undiscounted accrual under Subtopic 450-20 for a guarantee payment that is expected to occur many years in the future.

Recognition and Measurement Guidance — Overall Guidance

55-21 In many cases, the one-time premium received by a guarantor for issuing a guarantee will be an appropriate practical expedient for the initial measurement of the guarantee obligation (see paragraph 460-10-30-2[a]). However, if a one-time premium is specified for a guarantee that is issued in conjunction with another transaction (such as the sale of assets by the guarantor), the specified premium may not be an appropriate initial measurement of the guarantor’s liability because the amount specified as being applicable to the guarantee may or may not be its fair value (see paragraph 460-10-30-2[b]).

10.10.10 Other Liabilities

10.10.10.1 Convertible Debt

ASC 470-20

Instrument Issued as Repayment for Nonconvertible Instrument

30-19 If a convertible instrument is issued as repayment of a nonconvertible instrument at the nonconvertible instrument’s maturity, the fair value of the newly issued convertible instrument shall be the redemption amount owed at the maturity date of the original instrument if both of the following conditions exist:

The original instrument has matured.
The exchange of debt instruments is not a troubled debt restructuring that would be accounted for by the issuer under Subtopic 470-60.

Pending Content (Transition Guidance: ASC 815-40-65-1)

30-19 Paragraph superseded by Accounting Standards Update No. 2020-06.

Convertible Instruments Issued to Nonemployees for Goods and Services

30-25 Both of the following guidelines for determining the fair value of convertible instruments shall be used: . . .

b. Recent issuances of similar convertible instruments for cash to parties that only have an investor relationship with the issuer may provide the best evidence of fair value of the convertible instrument.

c. If reliable information under (b) is not available, the fair value of the convertible instrument shall be deemed to be no less than the fair value of the equity shares into which it can be converted.

Pending Content (Transition Guidance: ASC 815-40-65-1)

30-25 Paragraph superseded by Accounting Standards Update No. 2020-06.

Liability Component

35-14 If, under Subtopic 820-10, an issuer uses a valuation technique consistent with an income approach to measure the fair value of the liability component at initial recognition, the issuer shall consider the periods of cash flows used in the fair value measurement when determining the appropriate discount amortization period.

Pending Content (Transition Guidance: ASC 815-40-65-1)

35-14 Paragraph superseded by Accounting Standards Update No. 2020-06.

For additional discussion of the borrowing rate used to determine the fair value of the liability component of a convertible debt instrument within the scope of the cash conversion subsections of ASC 470-20, see Section 6.3.2 of Deloitte’s Roadmap Convertible Debt.

10.10.10.2 Physically Settled Forward Purchase Contracts

ASC 480-10

Certain Physically Settled Forward Purchase Contracts

30-3 Forward contracts that require physical settlement by repurchase of a fixed number of the issuer’s equity shares in exchange for cash shall be measured initially at the fair value of the shares at inception, adjusted for any consideration or unstated rights or privileges.

30-4 Two ways to obtain the adjusted fair value include:

Determining the amount of cash that would be paid under the conditions specified in the contract if the shares were repurchased immediately
Discounting the settlement amount, at the rate implicit at inception after taking into account any consideration or unstated rights or privileges that may have affected the terms of the transaction.

10.10.11 Assets of a Defined Benefit Pension or Other Postretirement Plan

ASC 715-30

Annuity and Other Contracts

35-60 Insurance contracts that are in substance equivalent to the purchase of annuities shall be accounted for as such. Other contracts with insurance entities shall be accounted for as investments and measured at fair value. For some contracts, the best available evidence of fair value may be contract value. If a contract has a determinable cash surrender value or conversion value, that is presumed to be its fair value.

Selection of Discount Rates

55-30 Use of assumed discount rates based on historical rates of return is inconsistent with the paragraph 715-30-35-50 requirement to value plan assets at fair value. If interest rates decline or rise, the effect of the requirement to use current rates is to increase or decrease the present value of the projected benefit obligation. That increase or decrease in the obligation is a loss or gain that would be offset to the extent of the gain or loss in the fair value of the plan’s dedicated portfolio of fixed-income investments. Any net gain or loss is subject to amortization as a component of net periodic pension cost.

Insurance Contracts

55-42 Guaranteed investment contracts are not annuity contracts because they transfer only investment risk to the insurer. The insurer does not unconditionally undertake a legal obligation to provide specified pension benefits to specific individuals. For a guaranteed investment contract with a specified maturity date and for which there is no intent to liquidate the contract before that date, evidence of the fair value of the guaranteed investment contract might be obtained by looking to current yields on fixed-maturity securities having similar risk characteristics and duration.

55-43 In an immediate participation guarantee investment contract, the market value adjustment should be considered in determining its fair value because, in effect, the contract value adjusted for any such market value adjustment represents the cash surrender value referred to in paragraph 715-30-35-60. If an immediate participation guarantee investment contract can be converted into an annuity contract, the conversion value of the contract should be considered in determining its fair value. The evidence of fair value noted for guaranteed investment contracts in the preceding paragraph should also be considered for immediate participation guarantee investment contracts.

ASC 715-60

Insurance Contracts

35-120 Other contracts with insurance entities may not meet the definition of an insurance contract because the insurance entity does not unconditionally undertake a legal obligation to provide specified benefits to specified individuals. Those contracts shall be accounted for as investments and measured at fair value. If a contract has a determinable cash surrender value or conversion value, that is presumed to be its fair value. For some contracts, the best available estimate of fair value may be contract value.

10.10.12 Contributions

ASC 720-25

30-2 Unconditional promises to give that are expected to be paid in less than one year may be measured at net settlement value because that amount, although not equivalent to the present value of estimated future cash flows, results in a reasonable estimate of fair value.

10.10.13 Business Combinations

ASC 805-20

Measuring the Fair Values of Particular Identifiable Assets and a Noncontrolling Interest in an Acquiree

30-3 The following guidance demonstrates the application of the measurement principle in paragraph 805-20-30-1 to specific situations in a business combination including guidance on measuring the fair values of particular identifiable assets and a noncontrolling interest in an acquiree.

Assets With Uncertain Cash Flows (Valuation Allowances)

30-4 The acquirer shall not recognize a separate valuation allowance as of the acquisition date for assets acquired in a business combination that are measured at their acquisition-date fair values because the effects of uncertainty about future cash flows are included in the fair value measure, unless the assets acquired are financial assets for which the acquirer shall refer to the guidance in paragraphs 805-20-30-4A through 30-4B.

30-4A For acquired financial assets that are not purchased financial assets with credit deterioration, the acquirer shall record the purchased financial assets at the acquisition-date fair value. Additionally, for these financial assets within the scope of Topic 326, an allowance shall be recorded with a corresponding charge to credit loss expense as of the reporting date.

30-4B For assets accounted for as purchased financial assets with credit deterioration (which includes beneficial interests that meet the criteria in paragraph 325-40-30-1A), an acquirer shall recognize an allowance in accordance with Topic 326 with a corresponding increase to the amortized cost basis of the financial asset(s) as of the acquisition date.

Assets Subject to Operating Leases in Which the Acquiree Is the Lessor

30-5 The acquirer shall measure the acquisition-date fair value of an asset, such as a building or a patent or other intangible asset, that is subject to an operating lease in which the acquiree is the lessor separately from the lease contract. In other words, the fair value of the asset shall be the same regardless of whether it is subject to an operating lease. In accordance with paragraph 805-20-25-12, the acquirer separately recognizes an asset or a liability if the terms of the lease are favorable or unfavorable relative to market terms.

Assets That the Acquirer Intends Not to Use or to Use in a Way Other Than Their Highest and Best Use

30-6 To protect its competitive position, or for other reasons, the acquirer may intend not to use an acquired nonfinancial asset actively, or it may not intend to use the asset according to its highest and best use. For example, that might be the case for an acquired research and development intangible asset that the acquirer plans to use defensively by preventing others from using it. Nevertheless, the acquirer shall measure the fair value of the nonfinancial asset in accordance with Subtopic 820-10 assuming its highest and best use by market participants in accordance with the appropriate valuation premise, both initially and for purposes of subsequent impairment testing.

Measuring the Fair Value of a Noncontrolling Interest in an Acquiree

30-7 Paragraph 805-20-30-1 requires the acquirer to measure a noncontrolling interest in the acquiree at its fair value at the acquisition date. An acquirer sometimes will be able to measure the acquisition-date fair value of a noncontrolling interest on the basis of a quoted price in an active market for the equity shares (that is, those not held by the acquirer). In other situations, however, a quoted price in an active market for the equity shares will not be available. In those situations, the acquirer would measure the fair value of the noncontrolling interest using another valuation technique.

30-8 The fair values of the acquirer’s interest in the acquiree and the noncontrolling interest on a per-share basis might differ. The main difference is likely to be the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control (also referred to as a noncontrolling interest discount) in the per-share fair value of the noncontrolling interest if market participants would take into account such a premium or discount when pricing the noncontrolling interest.

Measurement of Assets and Liabilities Arising From Contingencies

30-9 Paragraphs 805-20-25-18A through 25-20B establish the requirements related to recognition of certain assets and liabilities arising from contingencies. Initial measurement of assets and liabilities meeting the recognition criteria in paragraph 805-20-25-19 shall be at acquisition-date fair value. Guidance on the initial measurement of other assets and liabilities from contingencies not meeting the recognition criteria of that paragraph, but meeting the criteria in paragraph 805-20-25-20 is at paragraph 805-20-30-23.

Indemnification Assets

30-18 Paragraph 805-20-25-27 requires that the acquirer recognize an indemnification asset at the same time that it recognizes the indemnified item, measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. That paragraph also requires that, if the indemnification relates to an asset or a liability that is recognized at the acquisition date and measured at its acquisition-date fair value, the acquirer recognize the indemnification asset at the acquisition date measured at its acquisition-date fair value. For an indemnification asset measured at fair value, the effects of uncertainty about future cash flows because of collectibility considerations are included in the fair value measure and a separate valuation allowance is not necessary, as noted in paragraph 805-20-30-4.

Reacquired Rights

30-20 The acquirer shall measure the value of a reacquired right recognized as an intangible asset in accordance with paragraph 805-20-25-14 on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals in determining its fair value.

Recognition of Intangible Assets Separately From Goodwill

55-2 Paragraph 805-20-25-10 establishes that an intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion described in the definition of identifiable. An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is not transferable or separable from the acquiree or from other rights and obligations. For example:

An acquiree leases a manufacturing facility to a lessee under an operating lease that has terms that are favorable relative to market terms. The lease terms explicitly prohibit transfer of the lease (through either sale or sublease). The amount by which the lease terms are favorable compared with the pricing of current market transactions for the same or similar items is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract. See also paragraph 805-20-25-12.
An acquiree owns and operates a nuclear power plant. The license to operate that power plant is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even if the acquirer cannot sell or transfer it separately from the acquired power plant. An acquirer may recognize the fair value of the operating license and the fair value of the power plant as a single asset for financial reporting purposes if the useful lives of those assets are similar.
An acquiree owns a technology patent. It has licensed that patent to others for their exclusive use outside the domestic market, receiving a specified percentage of future foreign revenue in exchange. Both the technology patent and the related license agreement meet the contractual-legal criterion for recognition separately from goodwill even if selling or exchanging the patent and the related license agreement separately from one another would not be practical.

Assembled Workforce and Other Items That Are Not Identifiable

55-9 The identifiability criteria determine whether an intangible asset is recognized separately from goodwill. However, the criteria neither provide guidance for measuring the fair value of an intangible asset nor restrict the assumptions used in measuring the fair value of an intangible asset. For example, the acquirer would take into account the assumptions that market participants would use when pricing the intangible asset, such as expectations of future contract renewals, in measuring fair value. It is not necessary for the renewals themselves to meet the identifiability criteria. (However, see paragraph 805-20-30-20, which establishes an exception to the fair value measurement principle for reacquired rights recognized in a business combination.)

Servicing Contracts Such as Mortgage Servicing Contracts

55-35 If mortgage loans, credit card receivables, or other financial assets are acquired in a business combination with the servicing obligation, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.

Example 1: Customer Contract and Customer Relationship Intangible Assets Acquired in a Business Combination

Case B: One Customer, Contract in One of Two Lines of Business

55-55 Target manufactures goods in two distinct lines of business: sporting goods and electronics. Customer purchases both sporting goods and electronics from Target. Target has a contract with Customer to be its exclusive provider of sporting goods but has no contract for the supply of electronics to Customer. Both Target and Acquirer believe that only one overall customer relationship exists between Target and Customer. The contract to be Customer’s exclusive supplier of sporting goods, whether cancelable or not, meets the contractual-legal criterion. Additionally, because Target establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion. Because Target has only one customer relationship with Customer, the fair value of that relationship incorporates assumptions about Target’s relationship with Customer related to both sporting goods and electronics. However, if Acquirer determines that the customer relationships with Customer for sporting goods and for electronics are separate from each other, Acquirer would assess whether the customer relationship for electronics meets the separability criterion for identification as an intangible asset.

ASC 805-30

Measurement of Goodwill

30-2 In a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred.

30-3 To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the acquisition-date fair value of the acquirer’s interest in the acquiree determined using a valuation technique in place of the acquisition-date fair value of the consideration transferred (see paragraph 805-30-30-1(a)(1)). Paragraphs 805-30-55-3 through 55-5 provide additional guidance on applying the acquisition method to combinations of mutual entities, including measuring the acquisition-date fair value of the acquiree’s equity interests using a valuation technique.

Consideration Transferred

30-7 The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree, and the equity interests issued by the acquirer. (However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquiree’s grantees that is included in consideration transferred in the business combination shall be measured in accordance with paragraph 805-20-30-21 rather than at fair value.) Examples of potential forms of consideration include the following:

Cash
Other assets
A business or a subsidiary of the acquirer
Contingent consideration (see paragraphs 805-30-25-5 through 25-7)
Common or preferred equity instruments
Options
Warrants
Member interests of mutual entities.

30-8 The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, nonmonetary assets or a business of the acquirer). If so, the acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date and recognize the resulting gains or losses, if any, in earnings. However, sometimes the transferred assets or liabilities remain within the combined entity after the business combination (for example, because the assets or liabilities were transferred to the acquiree rather than to its former owners), and the acquirer therefore retains control of them. In that situation, the acquirer shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date and shall not recognize a gain or loss in earnings on assets or liabilities it controls both before and after the business combination.

Measuring the Acquisition-Date Fair Value of the Acquirer’s Interest in the Acquiree Using Valuation Techniques

55-2 In a business combination achieved without the transfer of consideration, the acquirer must substitute the acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the consideration transferred to measure goodwill or a gain on a bargain purchase (see paragraphs 805-30-30-1 through 30-4). Subtopic 820-10 provides guidance on using valuation techniques to measure fair value.

Special Consideration in Applying the Acquisition Method to Combinations of Mutual Entities

55-3 When two mutual entities combine, the fair value of the equity or member interests in the acquiree (or the fair value of the acquiree) may be more reliably measurable than the fair value of the member interests transferred by the acquirer. In that situation, paragraph 805-30-30-2 through 30-3 requires the acquirer to determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the acquirer’s equity interests transferred as consideration. In addition, the acquirer in a combination of mutual entities shall recognize the acquiree’s net assets as a direct addition to capital or equity in its statement of financial position, not as an addition to retained earnings, which is consistent with the way in which other types of entities apply the acquisition method.

55-4 Although they are similar in many ways to other businesses, mutual entities have distinct characteristics that arise primarily because their members are both customers and owners. Members of mutual entities generally expect to receive benefits for their membership, often in the form of reduced fees charged for goods and services or patronage dividends. The portion of patronage dividends allocated to each member is often based on the amount of business the member did with the mutual entity during the year.

55-5 A fair value measurement of a mutual entity should include the assumptions that market participants would make about future member benefits as well as any other relevant assumptions market participants would make about the mutual entity. For example, an estimated cash flow model may be used to determine the fair value of a mutual entity. The cash flows used as inputs to the model should be based on the expected cash flows of the mutual entity, which are likely to reflect reductions for member benefits, such as reduced fees charged for goods and services.

ASC 805-40

Measuring the Consideration Transferred

30-2 In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquiree. Instead, the accounting acquiree usually issues its equity shares to the owners of the accounting acquirer. Accordingly, the acquisition-date fair value of the consideration transferred by the accounting acquirer for its interest in the accounting acquiree is based on the number of equity interests the legal subsidiary would have had to issue to give the owners of the legal parent the same percentage equity interest in the combined entity that results from the reverse acquisition. Example 1, Case A (see paragraph 805-40-55-8) illustrates that calculation. The fair value of the number of equity interests calculated in that way can be used as the fair value of consideration transferred in exchange for the acquiree.

Example 1: Reverse Acquisitions

Case A: All the Shares of the Legal Subsidiary Are Exchanged

55-8 This Case illustrates the accounting for a reverse acquisition if all of the shares of the legal subsidiary, the accounting acquirer, are exchanged in a business combination. The accounting illustrated in this Case includes the calculation of the fair value of the consideration transferred, the measurement of goodwill and the calculation of earnings per share (EPS).

55-9 The calculation of the fair value of the consideration transferred follows.

55-10 As a result of the issuance of 150 common shares by Entity A (legal parent, accounting acquiree), Entity B’s shareholders own 60 percent of the issued shares of the combined entity, that is, 150 of 250 issued shares. The remaining 40 percent are owned by Entity A’s shareholders. If the business combination had taken the form of Entity B issuing additional common shares to Entity A’s shareholders in exchange for their common shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B’s shareholders would then own 60 of the 100 issued shares of Entity B — 60 percent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group’s interest in Entity A is $1,600 (40 shares with a per-share fair value of $40). The fair value of the consideration effectively transferred should be based on the most reliable measure. In this Case, the quoted market price of Entity A’s shares provides a more reliable basis for measuring the consideration effectively transferred than the estimated fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A’s shares ― 100 shares with a per-share fair value of $16.

55-11 Goodwill is measured as follows.

55-12 Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the group’s interest in Entity A) over the net amount of Entity A’s recognized identifiable assets and liabilities, as follows.

55-13 The consolidated statement of financial position immediately after the business combination is as follows.

55-14 In accordance with paragraph 805-40-45-2(c) through (d), the amount recognized as issued equity interests in the consolidated financial statements ($2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination ($600) and the fair value of the consideration effectively transferred, measured in accordance with paragraph 805-40-30-2 ($1,600). However, the equity structure appearing in the consolidated financial statements (that is, the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect the combination.

55-15 The calculation of EPS follows.

55-16 Entity B’s earnings for the annual period ended December 31, 20X5, were $600, and the consolidated earnings for the annual period ended December 31, 20X6, are $800. There was no change in the number of common shares issued by Entity B during the annual period ended December 31, 20X5, and during the period from January 1, 20X6, to the date of the reverse acquisition on September 30, 20X6. EPS for the annual period ended December 31, 20X6, is calculated as follows.

55-17 Restated EPS for the annual period ending December 31, 20X5, is $4.00 (calculated as the earnings of Entity B of 600 divided by the 150 common shares Entity A issued in the reverse acquisition).

Case B: Not All the Shares of the Legal Subsidiary Are Exchanged

55-18 This Case illustrates the accounting for a reverse acquisition if not all of the shares of the legal subsidiary, the accounting acquirer, are exchanged in a business combination and a noncontrolling interest results.

55-19 Assume the same facts as in Case A except that only 56 of Entity B’s 60 common shares are exchanged. Because Entity A issues 2.5 shares in exchange for each common share of Entity B, Entity A issues only 140 (rather than 150) shares. As a result, Entity B’s shareholders own 58.3 percent of the issued shares of the combined entity (140 of 240 issued shares). The fair value of the consideration transferred for Entity A, the accounting acquiree, is calculated by assuming that the combination had been effected by Entity B’s issuing additional common shares to the shareholders of Entity A in exchange for their common shares in Entity A. That is because Entity B is the accounting acquirer, and paragraphs 805-30-30-7 through 30-8 require the acquirer to measure the consideration exchanged for the accounting acquiree.

55-20 In calculating the number of shares that Entity B would have had to issue, the noncontrolling interest is ignored. The majority shareholders own 56 shares of Entity B. For that to represent a 58.3 percent equity interest, Entity B would have had to issue an additional 40 shares. The majority shareholders would then own 56 of the 96 issued shares of Entity B and, therefore, 58.3 percent of the combined entity. As a result, the fair value of the consideration transferred for Entity A, the accounting acquiree, is $1,600 (that is, 40 shares each with a fair value of $40). That is the same amount as when all 60 of Entity B’s shareholders tender all 60 of its common shares for exchange. The recognized amount of the group’s interest in Entity A, the accounting acquiree, does not change if some of Entity B’s shareholders do not participate in the exchange.

55-21 The noncontrolling interest is represented by the 4 shares of the total 60 shares of Entity B that are not exchanged for shares of Entity A. Therefore, the noncontrolling interest is 6.7 percent. The noncontrolling interest reflects the noncontrolling shareholders’ proportionate interests in the precombination carrying amounts of the net assets of Entity B, the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a noncontrolling interest of 6.7 percent of the precombination carrying amounts of Entity B’s net assets (that is, $134 or 6.7 percent of $2,000).

55-22 The consolidated statement of financial position at September 30, 20X6, reflecting the noncontrolling interest is as follows.

55-23 The noncontrolling interest of $134 has 2 components. The first component is the reclassification of the noncontrolling interest’s share of the accounting acquirer’s retained earnings immediately before the acquisition ($1,400 × 6.7% or $93.80). The second component represents the reclassification of the noncontrolling interest’s share of the accounting acquirer’s issued equity ($600 × 6.7% or $40.20).

ASC 805-50

Determining Cost

30-2 Asset acquisitions in which the consideration given is cash are measured by the amount of cash paid, which generally includes the transaction costs of the asset acquisition. However, if the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, or equity interests issued) and no other generally accepted accounting principles (GAAP) apply (for example, Topic 845 on nonmonetary transactions or Subtopic 610-20), measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable. For transactions involving nonmonetary consideration within the scope of Topic 845, an acquirer must first determine if any of the conditions in paragraph 845-10-30-3 apply. If the consideration given is nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20, the assets acquired shall be treated as noncash consideration and any gain or loss shall be recognized in accordance with Subtopic 610-20.

In addition to the Codification guidance above, the following guidance may be relevant to the determination of fair value amounts in a business combination:

Chapters 4 and 5 of Deloitte’s Roadmap Business Combinations, which provide additional guidance on fair value measurements in a business combination.
Section 10.2.7.4.3.1, which discusses the fair value measurement of assumed debt.
Cases A, B, and C of Example 1 in ASC 820-10-55 (see Sections 5.2.3.4 and 7.4).

10.10.14 Derivatives

ASC 815-10

35-1A As a practical expedient, a receive-variable, pay-fixed interest rate swap for which the simplified hedge accounting approach (see paragraphs 815-20-25-133 through 25-138 for scope) is applied may be measured subsequently at settlement value instead of fair value.

35-1B The primary difference between settlement value and fair value is that nonperformance risk is not considered in determining settlement value. One approach for estimating the receive-variable, pay-fixed interest rate swap’s settlement value is to perform a present value calculation of the swap’s remaining estimated cash flows using a valuation technique that is not adjusted for nonperformance risk.

ASC 815-15

Hybrid Instruments That Are Separated

30-2 The allocation method that records the embedded derivative at fair value and determines the initial carrying value assigned to the host contract as the difference between the basis of the hybrid instrument and the fair value of the embedded derivative shall be used to determine the carrying values of the host contract component and the embedded derivative component of a hybrid instrument if separate accounting for the embedded derivative is required by this Subtopic. (Note that Section 815-15-25 allows for a fair value election for hybrid financial instruments that otherwise would require bifurcation.)

30-3 The objective is to estimate the fair value of the derivative features separately from the fair value of the nonderivative portions of the contract. Estimates of fair value shall reflect all relevant features of each component. For example, an embedded purchased option that expires if the contract in which it is embedded is prepaid would have a different value than an option whose term is a specified period that is not subject to truncation.

Limitation on Sum of Component Fair Values

35-3 If the host contract component of a hybrid instrument is reported at fair value with changes in fair value recognized in earnings or other comprehensive income, then the sum of the fair values of the host contract component and the embedded derivative shall not exceed the overall fair value of the hybrid instrument.

10.10.15 Leases

ASC 842-30

Fair Value of the Underlying Asset

55-17A Notwithstanding the definition of fair value, if a lessor is not a manufacturer or a dealer, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between the acquisition of the underlying asset and lease commencement, the definition of fair value shall be applied.

ASC 842-50

Leveraged Lease Involving an Existing Asset of a Regulated Entity

55-1 Although the carrying amount of an asset acquired previously may not differ significantly from its fair value, it is unlikely that the two will be the same. However, regulated utilities have argued that the carrying amounts of certain of their assets always equal the fair value based on the utility’s ability to recover that cost in conjunction with a franchise to sell a related service in a specified area. That argument is not valid when considering the value of the asset to a third-party purchaser that does not own that franchise.

For more information about how an entity should consider fair value estimates in applying ASC 842, see Deloitte’s Roadmap Leases.

10.10.16 Nonmonetary Transactions

ASC 845-10

Basic Principle

30-1 In general, the accounting for nonmonetary transactions should be based on the fair values of the assets (or services) involved, which is the same basis as that used in monetary transactions. Thus, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss shall be recognized on the exchange. The fair value of the asset received shall be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered. Similarly, a nonmonetary asset received in a nonreciprocal transfer shall be recorded at the fair value of the asset received. A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer shall be recorded at the fair value of the asset transferred and a gain or loss shall be recognized on the disposition of the asset.

30-2 The fair value of an entity’s own stock reacquired may be a more clearly evident measure of the fair value of the asset distributed in a nonreciprocal transfer if the transaction involves distribution of a nonmonetary asset to eliminate a disproportionate part of owners’ interests (that is, to acquire stock for the treasury or for retirement). If one of the parties in a nonmonetary transaction could have elected to receive cash instead of the nonmonetary asset, the amount of cash that could have been received may be evidence of the fair value of the nonmonetary assets exchanged.

Commercial Substance

30-4 A nonmonetary exchange has commercial substance if the entity’s future cash flows are expected to significantly change as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met:

The configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. The configuration of future cash flows is composed of the risk, timing, and amount of the cash flows. A change in any one of those elements would be a change in configuration.
The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. An entity-specific value (referred to as an entity-specific measurement in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements) is different from a fair value measurement. As described in paragraph 24(b) of Concepts Statement No. 7, an entity-specific value attempts to capture the value of an asset or liability in the context of a particular entity. For example, an entity computing an entity-specific value of an asset would use its expectations about its use of that asset rather than the use assumed by marketplace participants. If it is determined that the transaction has commercial substance, the exchange would be measured at fair value, rather than at the entity-specific value.

A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange.

Applying the Basic Principle

30-8 Fair value should be regarded as not determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to an asset received in a nonmonetary transaction accounted for at fair value. An exchange involving parties with essentially opposing interests is not considered a prerequisite to determining a fair value of a nonmonetary asset transferred; nor does an exchange ensure that a fair value for accounting purposes can be ascertained within reasonable limits. If neither the fair value of a nonmonetary asset transferred nor the fair value of a nonmonetary asset received in exchange is determinable within reasonable limits, the recorded amount of the nonmonetary asset transferred from the entity may be the only available measure of the transaction.

ASC 845-10-30-2 states that “[i]f one of the parties in a nonmonetary transaction could have elected to receive cash instead of the nonmonetary asset, the amount of cash that could have been received may be evidence of the fair value of the nonmonetary assets exchanged.” The cash that could have been received in lieu of the nonmonetary asset exchanged may constitute evidence of fair value; however, it should not be considered a substitute for, or an expedient way of determining, fair value. The initial fair value measurement of the nonmonetary asset exchanged should be determined in accordance with ASC 820.

10.10.17 Reorganizations

10.10.17.1 General

ASC 852-20

30-2 A write-down of assets below amounts that are likely to be subsequently realized, though it may result in conservatism in the balance sheet at the readjustment date, may also result in overstatement of earnings or of retained earnings when the assets are subsequently realized. Therefore, in general, assets shall be carried forward as of the date of readjustment at fair and not unduly conservative amounts, determined with due regard for the accounting to be subsequently employed by the entity.

30-3 If the fair value of any asset is not readily determinable a conservative estimate may be made, but in that case the amount shall be described as an estimate. Paragraph 852-20-35-2 describes the subsequent accounting for any material difference arising through realization or otherwise and not attributable to events occurring or circumstances arising after that date.

General

35-2 If the fair value of any asset was not readily determinable and a conservative estimate was made at the date of the readjustment, any material difference arising through realization or otherwise and not attributable to events occurring or circumstances arising after that date shall not be carried to income or retained earnings. Similarly, if provisions for losses or charges established at the date of readjustment are subsequently found to have been excessive or insufficient, the difference shall not be carried to retained earnings nor used to offset losses or gains originating after the readjustment, but shall be recorded as additional paid-in capital.

SEC Staff Accounting Bulletin

SAB Topic 5.S, Quasi-Reorganization [Reproduced in ASC 852-20-S99-2]

Question 3: In connection with a quasi-reorganization, may there be a write-up of net assets?

Interpretive Response: No. The staff believes that increases in the recorded values of specific assets (or reductions in liabilities) to fair value are appropriate providing such adjustments are factually supportable, however, the amount of such increases are limited to offsetting adjustments to reflect decreases in other assets (or increases in liabilities) to reflect their new fair value. In other words, a quasi-reorganization should not result in a write-up of net assets of the registrant.

10.10.17.2 Determining Fair Value of Net Assets in a Quasi-Reorganization

ASC 852-20-30-2 and 30-3 provide guidance on the valuation of assets (and liabilities) in a quasi-reorganization. In a quasi-reorganization, an entity’s assets and liabilities (net assets) should be remeasured to fair value. Generally, an entity should calculate the fair value of net assets the same way it measures assets acquired and liabilities assumed in a business combination, as described in ASC 805-20-25 and ASC 805-20-30. (See Section 2.3.6.1 for a discussion of exceptions to applying the guidance in ASC 805-20-25 and ASC 805-20-30.) In addition, disposition of an asset shortly after a quasi-reorganization (e.g., generally within one year) serves as persuasive evidence of the value of the asset as of the date of the quasi-reorganization unless a significant event validates a change in the value of the asset in the intervening period.

Accordingly, some assets may be written up and others may be written down in value. However, the quasi-reorganization adjustments in total must not result in a write-up of net assets. If the calculated fair value adjustments would result in a write-up of net assets, the entity should first reduce goodwill, then other intangible assets, and then other noncurrent assets until the adjustment of net assets equals zero.

10.10.17.2.1 Determining Fair Value of Inventories

As discussed in Section 10.10.17.2, the process for calculating the fair value of an entity’s net assets in a quasi-reorganization should generally be the same as that for adjusting assets and liabilities to fair value in a business combination. ASC 805-20-30-1 requires that finished goods and works-in-process inventories be measured at fair value. However, the guidance in ASC 805-20-30-1 should not necessarily be used to value inventories in a quasi-reorganization. An entity effecting a quasi-reorganization may either use the approach in ASC 805-20-30-1 or value its inventories on the basis of replacement costs. The replacement-costs valuation technique is appropriate for inventories because the entity is a continuing entity that, in fact, manufactured the inventories in question.

10.10.17.3 Impact of Quasi-Reorganization Fair Value Adjustments on Impairment Testing

ASC 360-10-35-21 states that “[a] long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.” An impairment loss that would result from such an evaluation is treated differently than a fair value adjustment recognized in a quasi-reorganization. An entity must use significant judgment in determining whether an asset is impaired when a fair value write-down would otherwise be made in a quasi-reorganization. When an asset impairment, rather than an adjustment of fair value, is recorded in a quasi-reorganization, impairment losses are reflected in the statement of operations for the period before the effective date of the reorganization and fair value adjustments in a quasi-reorganization are reflected as direct entries to the accumulated deficit. A pending quasi-reorganization should be regarded as an impairment indicator and, accordingly, impairment should be assessed immediately before the effective date of the reorganization.

10.10.18 Transfers and Servicing

ASC 860-20

Estimating the Fair Value of Certain Beneficial Interests

55-16 Trust liquidation methods that allocate receipts of principal or interest between beneficial interest holders and transferors in proportions different from their stated percentage of ownership interests do not affect whether the transferor should obtain sale accounting and derecognize those transferred assets, assuming the trust is not required to be consolidated by the transferor. However, both turbo and bullet provisions in securitization structures (as discussed in paragraph 860-10-05-3) should be taken into consideration in determining the fair values of assets obtained by the transferor and transferee.

ASC 860-50

30-1 An entity shall initially measure at fair value, a servicing asset or servicing liability that qualifies for separate recognition regardless of whether explicit consideration was exchanged.

30-2 Typically, the benefits of servicing are expected to be more than adequate compensation to a servicer for performing the servicing, and the contract results in a servicing asset. However, if the benefits of servicing are not expected to adequately compensate a servicer for performing the servicing, the contract results in a servicing liability. Paragraph 860-50-35-1A states that a servicing asset may become a servicing liability, or vice versa, if circumstances change. The initial measure for servicing may be zero if the benefits of servicing are just adequate to compensate the servicer for its servicing responsibilities. A servicing contract that entitles the servicer to receive benefits of servicing just equal to adequate compensation, regardless of the servicer’s own servicing costs, does not result in recognizing a servicing asset or a servicing liability. A purchaser would neither pay nor receive payment to obtain the right to service for a rate just equal to adequate compensation.

30-3 The determination of whether the servicer is adequately compensated for servicing specified assets is based on the amount demanded by the marketplace, not the contractual amount to be paid to a replacement servicer. However, that contractual provision would be relevant for determining the amount of contractually specified servicing fees. Therefore, the amount that would be paid to a replacement servicer under the terms of the servicing contract can be more or less than adequate compensation.

30-4 Whether a servicing asset or servicing liability is recorded is a function of the marketplace, not the servicer’s cost of servicing. For example, a loss shall not be recognized if a servicing fee that is equal to or greater than adequate compensation is to be received but the servicer’s anticipated cost of servicing would exceed the fee.

30-6 When valuing the right to receive future cash flows from ancillary sources such as late fees, an entity shall estimate the value of the right to benefit from the cash flows of potential future transactions, not the value of the expected cash flows to be derived from future transactions.

30-7 Entities shall consider the nature of the assets being serviced as a factor in determining the fair value of a servicing asset or servicing liability. The types of assets being serviced affect the amount required to adequately compensate the servicer. Several variables, including the nature of the underlying assets, shall be considered in determining whether a servicer is adequately compensated. For example, the amount of effort required to service a home equity loan likely would be different from the amount of effort required to service a credit card receivable or a small business administration loan.

In initially recognizing an asset for a servicing right (or a liability for a servicing obligation) under ASC 860-50, an entity must compare the (1) estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues (benefits of servicing) with (2) adequate compensation. The concept of “adequate compensation” focuses on the benefits that fairly compensate a substitute servicer if one is required, including the profit that would be demanded in the marketplace. Since adequate compensation is determined in the marketplace, a servicer’s internal costs of servicing financial assets do not factor into the determination of the fair value of servicing assets or liabilities.

The cost of servicing financial assets varies among servicers and depends on factors such as the volume of financial assets serviced, the geographic location of the servicer, and the efficiency of the servicer. Accordingly, a servicer’s own cost of servicing financial assets is not relevant in the determination of adequate compensation. The determination of adequate compensation in an illiquid market often involves significant analysis and should be well documented. Adequate compensation is also discussed in ASC 860-50-30-2 through 30-7.

The approach in ASC 860 is consistent with the guidance in ASC 820, emphasizing that fair value measurement is market-based, not entity-specific. Therefore, a fair value measurement would also be determined on the basis of assumptions that market participants would use in pricing the servicing asset or liability. For more information about the accounting for servicing rights, see Chapter 6 of Deloitte’s Roadmap Transfers and Servicing of Financial Assets.

10.10.19 Industry Guidance

10.10.19.1 ASC 926, Entertainment — Films

ASC 926-20

Film Costs Valuation

35-14 A discounted cash flow model may be used to estimate fair value. If applicable, future cash flows based on the terms of any existing contractual arrangements, including cash flows over existing license periods without consideration of the limitations set forth in paragraph 926-20-35-5, shall be included.

35-15

An entity shall consider the following factors, among others, in estimating future cash inflows for a film:

If previously released, the film’s performance in prior markets
The public’s perception of the film’s story, cast, director, or producer
Historical results of similar films
Historical results of the cast, director, or producer on prior films
Running time of the film.

In determining a film’s (or film group’s) fair value, it is also necessary to consider those cash outflows necessary to generate the film’s (or film group’s) cash inflows. Therefore, an entity shall incorporate, if applicable, its estimates of future costs to complete a film, future exploitation and participation costs, or other necessary cash outflows in its determination of fair value when using a discounted cash flow model.

35-16 When using the traditional discounted cash flow approach to estimate the fair value of a film (or film group), the relevant future cash inflows and outflows shall represent the entity’s estimate of the most likely cash flows. When determining the fair value of a film (or film group) using the expected cash flow approach, all possible relevant future cash inflows and outflows shall be probability-weighted by period and the estimated mean or average by period shall be used.

35-17 When determining the fair value of a film (or film group) using a traditional discounted cash flow approach, the discount rate(s) shall not be an entity’s incremental borrowing rate(s), liability settlement rate(s), or weighted average cost of capital because those rates typically do not reflect the risks associated with a particular film (or film group). The discount rate(s) shall consider the time value of money and the expectations about possible variations in the amount or timing of the most likely cash flows and an element to reflect the price market participants would seek for bearing the uncertainty inherent in such an asset, as well as other factors, sometimes unidentifiable, including illiquidity and market imperfections. When determining the fair value of a film (or film group) using the expected cash flow approach, the discount rate(s) also would consider the time value of money. Because they are reflected in the expected cash flows, there would be no adjustment for possible variations in the amounts or timing of those cash flows. If not reflected in risk-adjusted expected cash flows, an additional element to reflect the price market participants would seek for bearing the uncertainty inherent in such an asset as well as other factors, sometimes unidentifiable, including illiquidity and market imperfections, shall be added to the discount rate(s).

Film Properties

40-3 An entity shall measure the loss as the amount by which the carrying amount of the project exceeds its fair value. Unless management, having the authority to approve the action, has committed to a plan to sell such property, the rebuttable presumption is that the entity will abandon the property and, as such, its fair value shall be zero.

10.10.19.2 ASC 930, Extractive Activities

ASC 930-805

Value Beyond Proven and Probable Reserves

30-1 An entity shall include value beyond proven and probable reserves in the value allocated to mining assets in a purchase price allocation to the extent that a market participant would include value beyond proven and probable reserves in determining the fair value of the asset.

Anticipated Future Price Fluctuations

30-2 An entity shall include the effects of anticipated fluctuations in the future market price of minerals in determining the fair value of mining assets in a purchase price allocation in a manner that is consistent with the expectations of marketplace participants. Generally, an entity should consider all available information including current prices, historical averages, and forward pricing curves. Those marketplace assumptions typically should be consistent with the acquiring entity’s operating plans with respect to developing and producing minerals. It generally would be inappropriate for an entity to use a single factor, such as the current price or a historical average, as a surrogate for estimating future prices without considering other information that a market participant would consider.

10.10.19.3 ASC 940, Financial Services — Brokers and Dealers

ASC 940-820

30-1 This Section does not purport to delineate all factors that may be considered by management in determining the fair value assigned to a particular financial instrument. However, the following is a list of certain factors that have been taken into consideration by broker-dealers as part of the determination of fair value:

Financial standing of the issuer
Business and financial plan of the issuer
Cost at date of purchase
The liquidity of the market
Contractual restrictions on salability
Pending public offering with respect to the financial instrument
Pending reorganization activity affecting the financial instrument (such as merger proposals, tender offers, debt restructurings, and conversions)
Reported prices and the extent of public trading in similar financial instruments of the issuer or comparable entities
Ability of the issuer to obtain needed financing
Changes in the economic conditions affecting the issuer
A recent purchase or sale of a security of the entity
Pricing by other dealers in similar securities.

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

This Section does not purport to delineate all factors that may be considered by management in determining the fair value assigned to a particular financial instrument. However, the following is a list of certain factors that have been taken into consideration by broker-dealers as part of the determination of fair value:

Financial standing of the issuer
Business and financial plan of the issuer
Cost at date of purchase
The liquidity of the market
Restrictions on salability (see paragraphs 820-10-35-6B and 820-10-35-36B)
Pending public offering with respect to the financial instrument
Pending reorganization activity affecting the financial instrument (such as merger proposals, tender offers, debt restructurings, and conversions)
Reported prices and the extent of public trading in similar financial instruments of the issuer or comparable entities
Ability of the issuer to obtain needed financing
Changes in the economic conditions affecting the issuer
A recent purchase or sale of a security of the entity
Pricing by other dealers in similar securities.

10.10.19.4 ASC 942, Financial Services — Depository and Lending

ASC 942-310

Debt-Equity Swap Programs

30-2 Since the secondary market for debt of financially troubled countries may be considered to be thin, it may not be the best indicator of the fair value of the equity investment or of net assets received. In light of this thin secondary market and of the unique nature of the transaction, it is also necessary to examine the fair value of the equity investment or net assets received. In arriving at the fair value of a debt-equity swap, both the secondary market price of the loan given up and the fair value of the equity investment or net assets received shall be considered.

30-3 It is the responsibility of management to measure fair value considering all of the circumstances and to see that the measurement of fair value is based on reasonable methods and assumptions consistent with Topic 820, including, as needed, information from independent appraisals. Factors to consider in measuring fair values include the following:

Similar transactions for cash
Estimated cash flows from the equity investment or net assets received
Fair value of similar equity investments, if any
Currency restrictions, if any, affecting dividends, the sale of the investment, or the repatriation of capital.

ASC 942-470

Fair Value of Deposit Liabilities

50-1 In estimating the fair value of deposit liabilities, a financial entity shall not take into account the value of its long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, not financial instruments.

10.10.19.5 ASC 944, Financial Services — Insurance

ASC 944-40

Pending Content (Transition Guidance: ASC 944-40-65-2)

Discount Rate

55-13E An insurance entity should maximize the use of current observable market prices of upper-medium-grade (low-credit-risk) fixed-income instruments with durations similar to the liability for future policy benefits.

An insurance entity should not substitute its own estimates for observable market data unless the market data reflect transactions that are not orderly (see paragraphs 820-10-35-54I through 35-54J for additional guidance on determining whether transactions are not orderly).
In determining points on the yield curve for which there are limited or no observable market data for upper-medium-grade (low-credit-risk) fixed-income instruments, an insurance entity should use an estimate that is consistent with existing guidance on fair value measurement in Topic 820, particularly for Level 3 fair value measurement.

10.10.19.6 ASC 946, Financial Services — Investment Companies

ASC 946-320

Dividends

35-6 Stock splits and stock dividends in shares of the same class as the shares owned are not income to the investment company. However, dividends for which the recipient has the choice to receive cash or stock are usually recognized as investment income in the amount of the cash option, because in such cases cash is usually the best evidence of fair value of the stock.

ASC 946-320-S99-12, ASC 946-320-S99-13, ASC 946-320-S99-17, ASC 946-320-S99-21, and ASC 946-320-S99-22 contain additional SEC guidance on the valuation of securities of a registered investment company, including the guidance in ASR 118.

ASC 946-830

Purchased Interest

45-14 Purchased interest represents the interest accrued between the last coupon date and the settlement date of the purchase. It should be recorded in the functional currency as interest receivable at the spot rate on the purchase trade date, and subsequently measured at fair value using each valuation date’s spot rate. After the settlement date, daily interest income should be accrued at the daily spot rate. It may be impractical to prepare the foregoing calculations daily, and, therefore, the use of a weekly or monthly average rate may be appropriate in many cases, especially if the exchange rate does not fluctuate significantly. However, if the exchange rate fluctuation is significant, the calculation should be made daily.

Subsequently Measuring at Fair Value

45-16 The fair value of securities shall initially be determined in the foreign currency and translated at the spot rate on the purchase trade date. The unrealized gain or loss between the original cost (translated on the trade date) and the fair value (translated on the valuation date) comprises both of the following elements:

Changes in the fair value of securities before translation
Movement in foreign currency rate.

10.10.19.7 ASC 948, Financial Services — Mortgage Banking

ASC 948-310

Loans Held for Sale

35-3 The fair value of mortgage loans and mortgage-backed securities held for sale shall be measured by type of loan. At a minimum, the fair value of residential (one- to four-family dwellings) and commercial mortgage loans shall be measured separately. Either the aggregate or individual loan basis may be used in determining the lower of amortized cost basis or fair value for each type of loan. Fair value for loans subject to investor purchase commitments (committed loans) and loans held on a speculative basis (uncommitted loans) shall be measured separately as follows:

Committed loans. Mortgage loans covered by investor commitments shall be based on the fair values of the loans.
Uncommitted loans. Fair value for uncommitted loans shall be based on principal market or, in the absence of a principal market, in the most advantageous market (see paragraphs 820-10-35-5 through 35-6C). That determination relies on the principles in Topic 820 and would include consideration of the following:
1. Market prices and yields sought by market participants in the principal or most advantageous market
2. Quoted Government National Mortgage Association (GNMA) security prices or other public market quotations for long-term mortgage loan rates
3. Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) current delivery prices.
Subparagraph superseded by Accounting Standards Update No. 2012-04.

Other Considerations

35-6 Capitalized costs of acquiring rights to service mortgage loans, associated with the purchase or origination of mortgage loans (see paragraph 860-50-25-1), shall be excluded from the cost of mortgage loans for the purpose of determining the lower of cost or fair value.

10.10.19.8 ASC 958, Not-for-Profit Entities

ASC 958-30

Fair Value Measurement

30-1 Topic 820 establishes a framework for measuring fair value. This Subtopic uses present value techniques as one possible technique to measure the contribution revenue and obligation to other beneficiaries of a split-interest agreement. See paragraphs 820-10-55-4 through 55-20 for implementation guidance for using present value techniques if the measurement objective is fair value. Other valuation techniques are also available, as discussed in Section 820-10-35.

Split-Interest Agreements Other Than Pooled Income Funds or Net-Income Unitrusts

30-5 If the split-interest agreement is other than a pooled income fund or net income unitrust (for example, a charitable gift annuity, a charitable lead trust, or a charitable remainder trust), the transferred assets, or a portion of those assets, are being held for the benefit of others, such as the donor or third parties designated by the donor. That liability shall be measured at fair value at the date of initial recognition. If present value techniques are used to measure fair value, the liability is measured at the present value of the future payments to be made to the other beneficiaries.

30-6 Any present value technique for measuring the fair value of the contribution or payments to be made to other beneficiaries shall consider the elements described in paragraph 820-10-55-5, including the following:

The estimated return on the invested assets during the expected term of the agreement
The contractual payment obligations under the agreement
A discount rate commensurate with the risks involved.

30-7 Under a lead interest agreement, the fair value of the contribution can be estimated directly based on the present value of the future distributions to be received by the NFP as a beneficiary. Under lead interest agreements, the future payments to be made to other beneficiaries will be made by the NFP only after the NFP receives its benefits. In those situations, the present value of the future payments to be made to other beneficiaries may be estimated by the fair value of the assets contributed by the donor under the agreement less the fair value of the benefits to be received by the NFP. If present value techniques are used, the fair value of the benefits to be received by the NFP shall be measured at the present value of the benefits to be received over the expected term of the agreement.

30-8 Under remainder interest agreements, the present value of the future payments to be made to other beneficiaries can be estimated directly based on the terms of the agreement. Future distributions will be received by the NFP only after obligations to other beneficiaries are satisfied. In those cases, the fair value of the contribution may be estimated based on the fair value of the assets contributed by the donor less the fair value of the payments to be made to other beneficiaries.

Pooled Income Funds or Net-Income Unitrusts

30-10 The contributed assets received from the donor under a pooled income fund agreement or a net income unitrust shall be recognized at fair value. The contribution shall be measured at fair value. Present value techniques are one valuation technique for measuring the fair value of the contribution; other valuation techniques are also available, as described in Topic 820. If present value techniques are used, the contribution may be measured at the fair value of the assets to be received, discounted for the estimated time period until the donor’s death.

Fair Value Measurement

35-1 Topic 820 establishes a framework for measuring fair value. This Subtopic uses present value techniques as one possible technique to measure the obligation to other beneficiaries of a split-interest agreement. See paragraphs 820-10-55-4 through 55-20 for implementation guidance for using present value techniques if the measurement objective is fair value.

35-2 The measurement objective is fair value for the following split-interest obligations:

Embedded derivatives subject to the measurement provisions of Topic 815
Obligations for which the not-for-profit entity (NFP) elects the fair value option pursuant to the Fair Value Option Subsections of Subtopic 825-10
Obligations containing embedded derivatives that the NFP has irrevocably elected to measure in their entirety at fair value in conformity with Section 815-15-25.

Additionally, in circumstances in which cash or other assets contributed by donors under split-interest agreements are held by independent trustees, such as a charitable trust for which a bank is a trustee, or by other fiscal agents of the donors or otherwise not controlled by the NFP, the measurement objective for the beneficial interest in periods after the period of initial recognition is fair value.

35-3 In circumstances in which the fair value is measured at the present value of the future cash flows, all elements discussed in paragraph 820-10-55-5, including discount rate assumptions, shall be revised at each measurement date to reflect current market conditions.

Split-Interest Agreements With Embedded Derivatives

35-7 If an NFP does not elect to report a split-interest obligation at fair value as described in paragraph 958-30-35-2, a split-interest obligation with an embedded derivative is bifurcated into its debt host contract and embedded derivative. The debt host contract is the liability for the payment to the beneficiary that would be required if the fair value of the trust assets does not change over the specified period. The embedded derivative represents the liability (or contraliability) for the increase (or decrease) in the payments to the beneficiary due to changes in the fair value of the trust assets over the specified period. In circumstances in which the liability is measured using present value techniques, the discount rate assumptions on the debt host contract shall not be revised after initial recognition, consistent with the preceding paragraph. In accordance with paragraph 815-10-35-1, the embedded derivative is subsequently measured at fair value. If the fair value of the embedded derivative is measured using present value techniques, all elements discussed in paragraph 820-10-55-5, including the discount rate assumptions on the embedded derivative, shall be revised at each measurement date to reflect current market conditions.

35-8 In conformity with paragraph 815-15-25-53, if an NFP cannot reliably identify and measure the embedded derivative, the entire split-interest liability shall be measured at fair value (that is, all elements discussed in paragraph 820-10-55-5, including discount rate assumptions, shall be revised to reflect current market conditions).

Assets Held by a Third Party

35-10 Pursuant to paragraph 958-605-35-3, if an NFP is the beneficiary of a split-interest agreement held by a third party and has an unconditional right to receive all or a portion of the specified cash flows from the assets held pursuant to that agreement, the NFP shall subsequently remeasure that beneficial interest at fair value. Changes in the fair value of the beneficial interest shall be recognized in the statement of activities. The change in the value of split-interest agreements is the change in the fair value of the NFP’s beneficial interest, which shall be determined using the same valuation technique that was used to measure the asset initially. Distributions from the trust shall be reflected as a reduction in the beneficial interest.

ASC 958-310

Fair Value Measurement

35-1 The Fair Value Option Subsections of Subtopic 825-10 create a fair value option under which a not-for-profit entity (NFP) may irrevocably elect fair value as the initial and subsequent measure for most receivables. If an NFP elects to measure a receivable at fair value and uses a present value technique to measure fair value, the discount rate assumptions, and all other elements discussed in paragraph 820-10-55-5 shall be revised at each measurement date to reflect current market conditions. Paragraph 820-10-35-2B states that a fair value measurement takes into account the effect of a restriction on the sale or use of an asset if market participants would take into account the effect of the restriction when pricing the asset. Example 6 (see paragraph 820-10-55-51) illustrates that restrictions that are a characteristic of an asset and, therefore, would transfer to a market participant are the only restrictions reflected in fair value. Donor restrictions that are specific to the donee are reflected in the classification of net assets, not in the measurement of fair value.

Changes in the Fair Value of Underlying Noncash Assets — Gifts of Certain Securities

35-11 The value of a contribution receivable arising from an unconditional promise to give equity securities with readily determinable fair values or debt securities may change between the date the unconditional promise to give is recognized and the date the asset promised is received because of changes in the future fair value of the underlying securities. For purposes of subsequent measurement, the method of determining the future fair value of the underlying securities shall be the same as the method used for determining that amount for purposes of initial measurement. Thus, if a promise to give securities is measured based on the fair value of the underlying securities at the date of gift, as described in paragraph 958-605-30-8, an observed change in the current fair value of the underlying securities shall be recognized. The change shall be reported as an increase or a decrease in contribution revenue in the period(s) in which the change occurs. The change shall be recognized in the net asset class in which the contribution was originally reported or in the net asset class in which the net assets are represented.

Changes in the Fair Value of Underlying Noncash Assets — Gifts of Other Assets

35-12 The value of a contribution receivable arising from an unconditional promise to give noncash assets other than equity securities with readily determinable fair values or debt securities may change between the date the unconditional promise to give is recognized and the date the asset promised is received because of changes in the future fair value of the underlying noncash assets. For purposes of subsequent measurement, the method for determining the future fair value of the underlying noncash asset shall be the same as the method used for determining that amount for purposes of initial measurement. Accordingly, assumed relationships, such as the relationship between the market price of the noncash asset at the time the initial measurement is made and its projected market price at the date the asset is expected to be received, shall be presumed to continue in determining whether the future fair value of the underlying noncash asset has changed.

ASC 958-405

Liability for Promises to Give

35-1 If the present value of the amounts to be paid is used to measure fair value of an unconditional promise to give at initial recognition, in conformity with paragraphs 835-30-25-10 through 25-11, the discount rate shall be determined at the time the unconditional promise to give is initially recognized and shall not be revised, unless the promise to give is subsequently remeasured at fair value pursuant to the Fair Value Option Subsections of Subtopic 825-10.

ASC 958-605

30-3 Paragraph 820-10-35-2B states that a fair value measurement takes into account the effect of a restriction on the sale or use of an asset if market participants would take into account the effect of the restriction when pricing the asset. Example 6 (see paragraph 820-10-55-51) illustrates that restrictions that are a characteristic of an asset, and, therefore, would transfer to a market participant, are the only restrictions reflected in fair value. Donor restrictions that are specific to the donee are reflected in the classification of net assets, not in the measurement of fair value.

Unconditional Promises to Give

30-4 If present value techniques are used to measure the fair value of unconditional promises to give, the entity shall determine the amount and timing of the future cash flows of unconditional promises to give cash (or, for promises to give noncash assets, the quantity and nature of assets expected to be received). In making that determination, the entity shall consider all the elements in paragraph 820-10-55-5, including the following:

When the receivable is expected to be collected
The creditworthiness of the other parties
The entity’s past collection experience
The entity’s policies concerning the enforcement of promises to give
Expectations about possible variations in the amount or timing of the cash flows (that is, the uncertainty inherent in the cash flows)
Other factors concerning the receivable’s collectibility.

30-5 If present value techniques are used to measure fair value, the present value of unconditional promises to give should be measured using a discount rate that is consistent with the general principles for present value measurement discussed in paragraphs 820-10-55-5 through 55-9. In conformity with paragraph 835-30-25-11, the discount rate shall be determined at the time the unconditional promise to give is initially recognized and shall not be revised subsequently unless the entity has elected to measure the promise to give at fair value in conformity with the Fair Value Option Subsections of Subtopic 825-10.

30-6 Unconditional promises to give that are expected to be collected in less than one year may be measured at net realizable value because that amount results in a reasonable estimate of fair value.

30-7 If a promise to give has not previously been recognized as contribution revenue because it was conditional, fair value shall be measured when the conditions are met.

Unconditional Promises to Give Noncash Assets

30-8 A present value technique is one valuation technique for measuring the fair value of an unconditional promise to give noncash assets; other valuation techniques also are available, as described in Topic 820. If present value techniques are used, the fair value of contributions arising from unconditional promises to give noncash assets might be determined based on the present value of the projected fair value of the underlying noncash assets at the date that those assets are expected to be received (that projected fair value is referred to in this Section as the future fair value) and in the quantities that those assets are expected to be received, if the date is one year or more after the financial statement date. Both the likelihood of the promise being fulfilled and the future fair value of those underlying assets, such as the future fair value per share of a promised equity security, should be considered in determining the future amount to be discounted. The quantity, nature, and timing of assets expected to be received, such as the number of shares of a promised equity security, the entity in which those shares represent an equity interest, and when those shares will be received should be considered in determining the likelihood of the promise being fulfilled. In cases in which the future fair value of the underlying asset is difficult to determine, the fair value of an unconditional promise to give noncash assets may be based on the fair value of the underlying asset at the date of initial recognition. No discount for the time value of money shall be reported if an asset’s fair value at the date of initial recognition is used to measure the fair value of the contribution.

Inventory Items

30-9 Inputs for measuring fair value of contributed inventory items may be obtained from published catalogs, vendors, independent appraisals, and other sources. If methods such as estimates, averages, or computational approximations, such as average value per pound or subsequent sales, can reduce the cost of measuring the fair value of inventory, use of those methods is appropriate, provided the methods are applied consistently, and the results of applying those methods are reasonably expected not to be materially different from the results of a detailed measurement of the fair value of contributed inventory.

Contributed Services

30-10 Contributions of services that create or enhance nonfinancial assets may be measured by referring to either the fair value of the services received or the fair value of the asset or of the asset enhancement resulting from the services. Fair value should be used for the measure regardless of whether the NFP could afford to purchase the services at their fair value.

Gifts in Kind

30-11 Gifts in kind that can be used or sold shall be measured at fair value. In determining fair value, entities should consider the quality and quantity of the gifts, as well as any applicable discounts that would have been received by the entity, including discounts based on that quantity if the assets had been acquired in exchange transactions. Fair value would generally not increase when a gift in kind is passed from one entity to another. However, fair value could increase if an entity adds value to the gift, such as by cleaning and packaging the gift. Any increases should be evaluated to determine whether the entity did, in fact, add to the fair value of the assets.

Specified Beneficiary

30-14 If the beneficiary has an unconditional right to receive all or a portion of the specified cash flows from a charitable trust or other identifiable pool of assets, the beneficiary shall measure that beneficial interest at fair value. The fair value of a perpetual trust held by a third party generally can be measured using the fair value of the assets contributed to the trust, unless facts and circumstances indicate that the fair value of the beneficial interest differs from the fair value of the assets contributed to the trust. If the beneficiary recognizes a receivable pursuant to paragraph 958-605-25-30, the beneficiary shall measure its rights to the assets held by a recipient entity at fair value in accordance with paragraph 958-605-30-2 and paragraphs 958-605-30-4 through 30-7 for unconditional promises to give.

Specified Beneficiary

35-3 If the beneficiary has an unconditional right to receive all or a portion of the specified cash flows from a charitable trust or other identifiable pool of assets, the beneficiary shall subsequently remeasure that beneficial interest at fair value (see paragraph 958-30-35-10). The fair value of a perpetual trust held by a third party generally can be measured using the fair value of the assets of the trust at the date of remeasurement, unless facts and circumstances indicate that the fair value of the beneficial interest differs from the fair value of the assets contributed to the trust. Annual distributions from a perpetual trust held by a third party are reported as investment income.

Example 1: Contribution of Real Property

55-34 Mission A would recognize the contributed property as an asset and as support and measure that property at its fair value (see paragraph 958-605-30-2). Information necessary to estimate the fair value of that property could be obtained from various sources, including amounts recently paid for similar properties in the locality, and estimates of its replacement cost adjusted to reflect the price that would be received for the contributed property. This contribution is revenue without donor restrictions because the donated assets may be used for any purpose and the donor did not impose a time restriction.

Example 4: Contribution of Utilities

55-44 The simultaneous receipt and use of electricity or other utilities is a form of contributed assets and not services. Foundation D would recognize the fair value of the contributed electricity as both revenue and expense in the period it is received and used (see paragraph 958-605-30-2). Foundation D could estimate the fair value of the electricity received by using rates normally charged to a consumer of similar usage requirements.

Example 7: Contribution of Services to Construct a Building

55-54 Institute G would recognize the services contributed by the construction entity because the contributed services received meet the condition in paragraph 958-605-25-16(a) (the services received create or enhance nonfinancial assets) or because the services meet the condition in paragraph 958-605-25-16(b) (the services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation). Contributions of services that create or enhance nonfinancial assets may be measured by referring to either the fair value of the services received or the fair value of the asset or of the asset enhancement resulting from the services (see paragraph 958-605-30-10). In this Example, the fair value of the contributed services received could be determined by subtracting the cost of the purchased services, materials, and permits ($400,000) from the fair value of the asset created ($725,000), which results in contributed services received of $325,000. Alternatively, the amount the construction entity would have charged could be used if more readily available.

Example 8: Contribution of Teaching Services

55-58 University H would recognize both revenue and expense for the services contributed by the uncompensated faculty members because the contribution meets the condition in paragraph 958-605-25-16(b). Teaching requires specialized skills; the religious personnel are qualified and trained to provide those skills; and University H typically would hire paid instructors if the religious personnel did not donate their services. University H could refer to the salaries it pays similarly qualified compensated faculty members to determine fair value of the services received.

55-59 Similarly, if the uncompensated faculty members were given a nominal stipend to help defray certain of their out-of-pocket expenses, University H still would recognize both revenue and expense for the services contributed. The contribution received would be measured at the fair value of the services received less the amount of the nominal stipend paid.

Example 7: Donor Establishes a Charitable Trust

55-98 The Contribution Received Subsections of this Subtopic do not establish standards for the trustee, National Bank J (see paragraph 958-605-15-9). Because Museum I is unable to influence the operating or financial decisions of the trustee, Museum I and National Bank are not financially interrelated entities. Therefore, Museum I would recognize its asset (a beneficial interest in the trust) and contribution revenue that increases net assets with donor restrictions (see paragraph 958-605-35-3). Museum I would measure its beneficial interest at fair value. That value generally can be measured by the fair value of the assets contributed to the trust.

Example 10: Resource Provider Names Itself as the Specified Beneficiary

55-110 If a resource provider transfers assets to a recipient entity and specifies itself or its affiliate as the beneficiary, a presumption that the transfer is reciprocal, and therefore not a contribution, is necessary even if the resource provider explicitly grants the recipient entity variance power. Thus, Symphony Orchestra M would recognize an asset and Community Foundation N would recognize a liability because the transaction is deemed to be reciprocal. Symphony Orchestra M transfers its securities to Community Foundation N in exchange for future distributions. Community Foundation N, by its acceptance of the transfer, agrees that at the time of the transfer distributions to Symphony Orchestra M are capable of fulfillment and consistent with the foundation’s mission. Although the fair value of those future distributions may not be commensurate with the fair value of the securities given up (because Symphony Orchestra M is at risk of cessation of the distributions), the transaction is accounted for as though those values are commensurate. In comparison, the donors to Community Foundation F in Example 5 (see paragraph 958-605-55-88) explicitly grant variance power to Community Foundation F in a nonreciprocal transfer. In that Example, it is clear that the donors have made a contribution because they retain no beneficial interests in the transferred assets. Because the donors in that Example explicitly grant variance power to Community Foundation F, it, rather than City Botanical Society E, is the recipient of that contribution.

10.10.19.9 ASC 962, Plan Accounting — Defined Contribution Pension Plans

ASC 962-325

Reporting at Fair Value

35-2 Some plan investments may not have Level 1 inputs to measure fair value. Therefore, they will need to be measured in accordance with the other valuation techniques described in Topic 820. Examples include all of the following:

Real estate
Mortgages or other loans
Limited partnerships
Restricted securities
Unregistered securities
Securities that are traded in inactive markets
Nontransferable investment contracts.

35-3 Both of the following are the obligation of the plan’s trustees, the administrator, and the corporate trustee:

To satisfy themselves that all appropriate factors relevant to the value of the investments have been considered
To select a method to measure the fair value of the investments.

35-4 To the extent considered necessary, the plan may use the services of a specialist to assist the plan (or the administrators) in measuring the fair value of investments. Topic 820 provides guidance on how to measure fair value.

Implementation Guidance

55-1 The following illustrate fair value and contract value reporting guidance in paragraphs 962-325-35-5 through 35-12 (also see fully benefit-responsive investment contract) for defined-contribution plan investments.

55-2 The value is determined within the context of the objectives of financial statements for a defined contribution plan. The valuation must reflect the ability of the plan to pay benefits from the perspective of the participants. This value is then reflected on participants’ statements to disclose the amount they can expect to receive when they exercise their rights to withdraw, borrow, or transfer funds under the terms of the plan.

A Five-Year Public Bond (or Portfolio of Bonds) Guaranteed by a Third Party to Have a Fixed Value at the End of Three Years

55-3 A five-year public bond (or portfolio of bonds) is guaranteed by a third party to have a fixed value at the end of three years. The guarantee applies only to the extent that the bond (or portfolio) is not liquidated before the end of three years. Liquidation within three years is at fair value.

55-4 Because guaranteed proceeds from the bond are not available for benefit withdrawals or transfers prior to maturity, the contract is not fully benefit-responsive and, therefore, net assets available for benefits shall reflect the fair value for this investment contract. Fair value should be measured in accordance with Topic 820.

A Benefit-Responsive Investment Contract

55-5 A contract provides a fixed crediting interest rate, and a financially responsible entity guarantees liquidity at contract value before maturity for any and all participant-initiated benefit withdrawals, loans, or transfers arising under the terms of the plan, which allows access for all participants on a quarterly basis.

55-6 The net assets available for benefits should reflect the contract value for this investment contract, because the plan will receive such value and only such value if the contract is accessed to pay participant benefits or transfers.

55-7 This contract would be viewed as fully benefit-responsive. Examples of some variations on this contract, and their impact on the valuation, include the following:

Liquidity at contract value is not guaranteed for benefits that are attributable to termination of the plan, a plan spinoff to a new employer plan, or amendments to plan provisions. Net assets available for benefits should reflect the contract value for this investment contract, unless it is probable that the plan will be terminated, spun off, or amended.
Liquidity at contract value is not guaranteed for benefits that are attributable to the layoff of a large group of workers or an early retirement program. Net assets available for benefits should reflect the contract value for this investment contract, unless it is probable that termination of the employment of a significant number of employees will occur.
The contract will pay for benefits of up to 30 percent of the contract at contract value, and any excess benefits will be at some adjusted value. Net assets available for benefits should reflect the fair value for this investment contract because they are not fully benefit-responsive.
The contract will pay benefits at contract value, but only if the issuer of the contract determines that there is sufficient liquidity in the portfolio of assets that backs the contract. Because the third party has not guaranteed liquidity for participant-initiated withdrawals, net assets available for benefits should reflect the fair value for this investment contract because they are not fully benefit-responsive.
The contract will not pay benefits at contract value if benefits are due to participant transfers to another fixed income investment option, unless the funds are invested in an equity option for at least three months (equity wash provisions). Net assets available for benefits shall reflect the contract value for this investment contract because the contract would be considered fully benefit-responsive.

A Five-Year, Non-Benefit-Responsive Investment Contract That Has No Liquid Market for Trading

55-8 Net assets available for benefits should reflect the fair value for such an investment contract because there is no guarantee of liquidity at contract value. Fair value would be measured in the same manner as for an illiquid bond. Topic 820 includes a discussion of methods used to measure the fair values of illiquid instruments.

A Benefit-Responsive, Participating, Separate Account Investment Contract

55-9 A financially responsible issuer pays contract value for participant withdrawals, regardless of the value of the assets in the separate account. The credited interest rate is a function of the relationship between the contract value and the value of the assets in the separate account. The rate is reset periodically, daily, monthly, quarterly, and so on, by the issuer and cannot be less than zero. There may or may not be a specified maturity date on the contract. The contract holder may terminate the contract at any time, and receive the value of the assets in the separate account.

55-10 Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.

A Synthetic Investment Contract — Managed Type

55-11 Such a contract operates similarly to a separate account guaranteed investment contract, except that the assets are placed in a trust (with ownership by the plan) rather than a separate account of the issuer and a financially responsible third party issues a wrapper contract that provides that participants can, and must, execute plan transactions at contract value.

55-12 Net assets available for benefits should reflect the contract value for this investment contract because participants are guaranteed return of principal and accrued interest.

A Synthetic Investment Contract — Repurchase Type

55-13 Under such a contract, the plan purchases a bond and places it in trust. The plan then contracts with a financially responsible third party to provide benefit responsiveness. Under the contract, should the bond need to be sold to meet a participant-initiated withdrawal benefit, loan, or transfer, the plan is obligated to sell the bond to the contract issuer, and the issuer is obligated to buy the bond. The transaction price is defined under the contract (for example, amortized cost).

55-14 Net assets available for benefits should reflect the contract value for this investment contract because return of principal and accrued interest has been guaranteed to participants.

55-15 If the contract provided only an option for the sponsor to sell the bond to the issuer, rather than an obligation to do so, reflecting net assets available for benefits at contract value for this investment contract would also apply.

See also Example 2 in ASC 962-325-55-17 for an illustration of the application of ASC 962-325 to the financial statements of a defined contribution plan.

10.10.19.10 ASC 965, Plan Accounting — Health and Welfare Benefit Plans

ASC 965-325

Implementation Guidance

55-1 Implementation guidance in Section 962-325-55 illustrates the guidance in paragraphs 965-325-35-6 through 35-8 for the application of fair value less costs to sell, if significant, and contract value reporting for health and welfare plan investments. In each situation, value is determined within the context of the objectives of financial statements for a defined contribution plan. The valuation must reflect the ability of the plan to pay benefits from the perspective of the participants. This value is then reflected on participants’ statements to disclose the amount they can expect to receive when they exercise their rights to withdraw, borrow, or transfer funds under the terms of the plan.

55-2 See paragraph 962-325-55-3 for implementation guidance on a five-year public bond (or portfolio of bonds) that is guaranteed by a third party to have a fixed value at the end of three years.

55-3 See paragraphs 962-325-55-5 through 55-7 for implementation guidance on a fully benefit-responsive investment contract.

55-4 See paragraph 962-325-55-8 for implementation guidance on a five-year, non-benefit-responsive investment contract that has no liquid market for trading.

55-5 See paragraph 962-325-55-10 for implementation guidance on a benefit-responsive participating separate account investment contract.

55-6 See paragraph 962-325-55-12 for implementation guidance on a synthetic contract (managed type).

55-7 See paragraph 962-325-55-13 for implementation guidance on a synthetic investment contract (repurchase type).

Illustrations

55-8 See Example 2 (paragraph 962-325-55-17) for financial statements that illustrate certain applications of the provisions of this Subtopic that apply to the annual financial statements of a defined contribution plan.

10.10.19.11 ASC 970, Real Estate — General

ASC 970-340

Amenities

25-10 Costs of amenities shall be allocated among land parcels benefited and for which development is probable. A land parcel may be considered to be an individual lot or unit, an amenity, or a phase. The fair value of a parcel is affected by its physical characteristics, its highest and best use, and the time and cost required for the buyer to make such use of the property considering access, development plans, zoning restrictions, and market absorption factors.

10.10.19.12 ASC 972, Real Estate — Common Interest Realty Associations

ASC 972-360

30-1 Common property recognized as assets of a common interest realty association shall be initially measured at the common interest realty association’s cost to acquire it if the common interest realty association acquired the property in a monetary transaction. If the common interest realty association acquired the property in a nonmonetary transaction, such as by a nonreciprocal transfer from the developer, and if the property is recognized as an asset of the common interest realty association, the common interest realty association shall initially measure the property using fair value at the date of its acquisition. It may be helpful to consider the developer’s cost, if it is known, in determining the fair value.