4.3 Allocation to Multiple Units of Account

4.3.1 General

The unit of account (see Section 4.1) represents what is being measured for financial reporting purposes and is related to the level at which assets, liabilities, or equity instruments are aggregated or disaggregated for recognition in the financial statements. With one exception, the unit of account is determined on the basis of guidance in other Codification topics.

The unit of valuation (see Section 5.1) is the grouping of assets, liabilities, or equity instruments for fair value measurement purposes. ASC 820 provides guidance on determining the unit of valuation (see Chapter 5 for more information).

The unit of account may differ from the unit of valuation. Furthermore, even when the unit of account and unit of valuation are the same, the unit of account for fair value measurement purposes may be at a more aggregated level than the unit of account for recognition purposes (e.g., an entity may determine the fair value of a reporting unit to recognize a goodwill impairment loss, in which case the unit of account for the impairment loss is at a more disaggregated level than the unit of account for the fair value measurement, which is the reporting unit). In these circumstances, an entity must allocate the fair value measurement to the individual units of account subject to this measurement. ASC 820 is silent on how to perform this allocation. To do so, an entity must therefore consider the individual facts and circumstances, along with other relevant Codification topics. The Codification topic that specifies the requirement (or ability) to measure an asset, liability, or equity instrument at fair value will generally provide guidance on how to allocate fair value measurements to the appropriate units of account. See Section 4.3.3 for more information.

4.3.2 Financial Assets, Nonfinancial Derivative Assets, Liabilities, and Equity Instruments

The unit of account and unit of valuation are generally the same for financial assets, nonfinancial derivative assets, liabilities, and instruments classified in stockholders’ equity. For such instruments, both the unit of account and the unit of valuation are generally the individual asset, liability, or equity instrument. Therefore, no allocation is necessary for such instruments.

However, as discussed below, there are exceptions to the general principle that the unit of account and unit of valuation are the same for financial assets, nonfinancial derivative assets, liabilities, and instruments classified in stockholders’ equity. Note also that when a derivative instrument must be bifurcated from its host contract, there are two units of account under ASC 815-15 (i.e., the host contract and the embedded derivative) even though the hybrid instrument is considered a freestanding financial instrument. However, when the embedded derivative is measured at fair value, the unit of account and unit of valuation for the embedded derivative are the same.

4.3.2.1 Portfolio Valuation Exception for Certain Groups of Assets and Liabilities With Offsetting Risk Positions

One exception to the general principle discussed above applies to the unit of account and unit of valuation for certain financial instruments and nonfinancial derivatives. The exception is available for certain groups of assets and liabilities if an entity (1) manages the group of assets and liabilities on the basis of a net exposure to a market risk (or risks) or counterparty credit risk, (2) provides information on that basis to management, and (3) measures those assets and liabilities at fair value in the statement of financial position. To use this exception, an entity must make an accounting policy decision. Once the accounting policy is established, the entity must consistently apply it from period to period for a particular portfolio. If an entity has made this accounting policy election, the unit of valuation is the entire portfolio of assets and liabilities with offsetting risk exposures. After measuring the fair value of the entire portfolio, the entity must allocate portfolio-based fair value measurement to the individual units of account within the portfolio. Under ASC 820-10-35-18F, such allocations must be performed “on a reasonable and consistent basis using a methodology appropriate in the circumstances.”

See Sections 5.3 and 10.2.8 for more information about this unit-of-valuation exception and how an allocation may be made to the individual units of account for disclosure purposes.

AICPA Technical Q&As Section 6910.34 discusses a similar portfolio-level valuation approach in which an investment company owns a controlling interest in an investee company and holds both equity and debt instruments issued by the investee.

4.3.2.2 Liabilities With Third-Party Credit Enhancements

As discussed in Section 10.2.7, an entity may measure the fair value of a liability on the basis of the identical item held as an asset by another party. If the asset includes an inseparable third-party credit enhancement, the unit of account for the liability excludes this credit enhancement. As a result, the valuation premise for the liability is different from the unit of account. Accordingly, an entity must adjust the observed price of the asset so that the fair value measurement of the liability is determined in accordance with its unit of account.

4.3.3 Nonfinancial Assets Other Than Nonfinancial Derivative Assets

ASC 820-10

Valuation Premise for Nonfinancial Assets

35-10E The highest and best use of a nonfinancial asset establishes the valuation premise used to measure the fair value of the asset, as follows:

The highest and best use of a nonfinancial asset might provide maximum value to market participants through its use in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (for example, a business).
1. If the highest and best use of the asset is to use the asset in combination with other assets or with other assets and liabilities, the fair value of the asset is the price that would be received in a current transaction to sell the asset assuming that the asset would be used with other assets or with other assets and liabilities and that those assets and liabilities (that is, its complementary assets and the associated liabilities) would be available to market participants.
2. Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the group of assets.
3. Assumptions about the highest and best use of a nonfinancial asset shall be consistent for all of the assets (for which highest and best use is relevant) of the group of assets or the group of assets and liabilities within which the asset would be used.
The highest and best use of a nonfinancial asset might provide maximum value to market participants on a standalone basis. If the highest and best use of the asset is to use it on a standalone basis, the fair value of the asset is the price that would be received in a current transaction to sell the asset to market participants that would use the asset on a standalone basis.

35-11A The fair value measurement of a nonfinancial asset assumes that the asset is sold consistent with the unit of account specified in other Topics (which may be an individual asset). That is the case even when that fair value measurement assumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities because a fair value measurement assumes that the market participant already holds the complementary assets and associated liabilities.

For nonfinancial assets other than nonfinancial derivative assets, ASC 820 establishes a valuation premise on the basis of the “highest and best use.” As a result, the fair value measurement may encompass a combination of assets and liabilities, including financial instruments. That combination may not be consistent with the unit of account for fair value measurement purposes. Accordingly, an entity will need to allocate the fair value measurement to individual units of account. Other Codification topics will generally specify how to allocate the fair value measurement to individual units of account when either (1) the fair value measurement is performed on the basis of the highest and best use, which is at a level that differs from the unit of account for fair value measurement purposes, or (2) the unit of account for fair value measurement purposes differs from the unit of account for recognition purposes.1 Below are two situations in which (1) a fair value measurement of nonfinancial assets is performed at a level that is more aggregated than the unit of account for recognition purposes and (2) that fair value amount must therefore be allocated to the units of account. In other situations, entities should determine how to allocate the fair value measurement to the individual units of account by evaluating the facts and circumstances in the context of the guidance in the relevant Codification topic that requires the fair value measurement.

Goodwill — ASC 350 provides guidance on impairment of goodwill. In testing goodwill for impairment under ASC 350, an entity that has not adopted the private company alternative that allows for goodwill impairment testing at the entity level must measure the fair value of the reporting unit to which the goodwill has been allocated.2 Thus, the reporting unit is the unit of account for fair value measurement purposes. The reporting unit may or may not be the unit of valuation depending on the facts and circumstances. If an impairment of goodwill exists, only goodwill is written down. ASC 350 provides guidance on how to calculate the goodwill impairment loss. As noted in ASC 350-20-35-9, an entity measures the goodwill impairment loss by comparing the implied fair value of the goodwill of the reporting unit with the carrying amount of goodwill. The implied fair value of the goodwill of the reporting unit, which represents only a subset of the overall fair value of the reporting unit, is determined in accordance with ASC 350-20-35-14 through 35-17.

Changing Lanes

Under ASC 350, before the amendments made by ASU 2017-04, impairment of goodwill was “the condition that exists when the carrying amount of goodwill exceeds its implied fair value.” The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The process of measuring the implied fair value of goodwill was referred to as step 2 of the goodwill impairment test. To perform step 2, an entity was required to “assign the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination.” Accordingly, performing step 2 sometimes resulted in significant cost and complexity since the “fair value of goodwill can be measured only as a residual and cannot be measured directly.”

ASU 2017-04 simplified the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. As amended, ASC 350 states that if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” As a result, in measuring the amount of any goodwill impairment loss, an entity no longer needs to allocate the fair value of a reporting unit to individual assets and liabilities to determine the implied fair value of goodwill.
Long-lived assets — ASC 360 requires entities to test long-lived assets for impairment at the asset group level if the assets are held and used and at the disposal group level if the assets are HFS. Thus, the asset (disposal) group is the unit of account for impairment testing purposes. However, each individual long-lived asset represents an individual unit of account for recognition purposes. Furthermore, the unit of valuation (on the basis of the “highest and best use” concept) could be at a different level than the asset (disposal) group that is being measured at fair value. Accordingly, if there is an impairment loss (e.g., the fair value of an asset [disposal] group is less than its carrying amount), in accordance with ASC 360-10-35-28, the “loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.” In addition, ASC 360 provides guidance on how to allocate the fair value of an asset (disposal) group to financial instruments that are reported at fair value.3 See also Example 3-1.

If the unit of valuation is at a more aggregated level than the unit of account and the Codification topic requiring the fair value measurement does not provide guidance on how to allocate the fair value measurement to the unit (or units) of account, an entity must evaluate the facts and circumstances and use judgment to determine how to appropriately allocate this fair value measurement. In many situations, the use of a relative fair value or another pro rata basis may be appropriate. However, before allocating on such a basis, an entity must ensure that (1) none of the individual assets or liabilities within the group must (or will) be recognized at fair value on an ongoing basis and (2) the allocation would not inappropriately result in the recognition of an asset at more than its fair value. When individual assets or liabilities within a larger group are subsequently measured at fair value, an allocation on the basis of a relative fair value approach will lead to an immediate gain or loss in earnings for the difference between the amount allocated and the then fair value of the asset or liability. This is generally not appropriate. Similarly, if an amount in excess of fair value is allocated to an asset that is not subsequently measured at fair value, the asset may have an immediate impairment loss that must be recognized.

Footnotes

For example, the unit of valuation and unit of account for the purpose of testing a film group for impairment may be the film group. However, if an impairment loss is recognized, that loss must be allocated to the films and license agreements within the film group. ASC 926-20-35-19 specifies how to allocate an impairment loss attributable to a film group.

ASU 2019-06 extended the accounting alternatives available to private entities to NFP entities.

ASC 360 also provides guidance on situations in which an asset (disposal) group contains other assets that are not long-lived assets (e.g., inventory or receivables).

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