7.3 Lack of Market Participants

Now, I’d like to provide a few thoughts on developing market participant assumptions when measuring fair value.

As many of you know, Codification Topic 820 requires that fair value measurements be performed from the perspective of market participants. While this requirement is easy to understand conceptually, the staff understands that some practitioners have encountered challenges trying to implement it in practice for assets and liabilities where observable pricing information is not available. In limited instances, market participant assumptions may not be readily available without undue cost and effort. Furthermore, it is possible that assumptions may vary substantially based on the facts and circumstances of each category of market participants. As a result, the lack of information or inability to obtain consistent information may present challenges in developing market participant assumptions when measuring fair value.

Understanding these challenges, I wanted to provide you with our views of how one could look at developing market participant assumptions for fair value measurements. In general, I anticipate that most fair value measurements of assets or liabilities that trade in inactive markets or for which a market doesn’t exist will begin by looking at a reporting entity’s own assumptions. These assumptions may include the reporting entity’s expected use of the asset, the asset’s life, and any related cash flow estimates from the use or sale of the asset. Using those assumptions as a starting point, reasonable judgment should be applied to determine if an entity’s own assumptions are representative of market participant assumptions. We would suggest a reporting entity consider the following questions when performing this analysis. In order to illustrate how one might consider these questions in practice, I have also included a simplified example of a customer related intangible asset.