4.2 Unit of Account Prescribed by ASC 820
ASC 820-10
Level 1 Inputs
35-44 If a
reporting entity holds a position in a single asset or
liability (including a position comprising a large number of
identical assets or liabilities, such as a holding of
financial instruments) and the asset or liability is traded
in an active market, the fair value of the asset or
liability shall be measured within Level 1 as the product of
the quoted price for the individual asset or liability and
the quantity held by the reporting entity. That is the case,
even if a market’s normal daily trading volume is not
sufficient to absorb the quantity held and placing orders to
sell the position in a single transaction might affect the
quoted price.
As discussed in Section 4.1, ASC 820 specifies
one circumstance in which the unit of account is determined for an asset, liability,
or equity instrument for fair value measurement or disclosure purposes. In all other
instances, entities must determine the unit of account on the basis of other GAAP
under which fair value measurement of an item is required (or permitted). ASC
820-10-35-44 specifies the unit of account (and the unit of valuation) for holdings
of a single asset or liability traded in an active market. For such assets or
liabilities, fair value is measured as “the product of the quoted price for the
individual asset or liability and the quantity held by the . . . entity.”
Paragraph C80 of the Basis for Conclusions of FASB Statement 157 (codified in ASC
820) discusses this unit-of-account requirement and states, in part:
This Statement precludes the use of blockage factors and eliminates the
exception to P×Q in the Guides for a financial instrument that trades in an
active market (within Level 1). In other words, the unit of account for an
instrument that trades in an active market is the individual trading unit.
This Statement amends Statements 107, 115, 124, 133, and 140 to remove the
similar unit-of-account guidance in those accounting pronouncements, which
referred to a fair value measurement using P×Q for an instrument that trades
in any market, including a market that is not active, for example, a thin
market (within Level 2). In this Statement, the Board decided not to specify
the unit of account for an instrument that trades in a market that is not
active.
The FASB addressed inactive markets in subsequently issued guidance. See Section 10.6 for further discussion.