9.1 Introduction
ASC 820-10
30-1 The fair
value measurement framework, which applies at both initial
and subsequent measurement if fair value is required or
permitted by other Topics, is discussed primarily in Section
820-10-35. This Section sets out additional guidance
specific to applying the framework at initial
measurement.
30-2 When an
asset is acquired or a liability is assumed in an exchange
transaction for that asset or liability, the transaction
price is the price paid to acquire the asset or received to
assume the liability (an entry price). In contrast, the fair
value of the asset or liability is the price that would be
received to sell the asset or paid to transfer the liability
(an exit price). Entities do not necessarily sell assets at
the prices paid to acquire them. Similarly, entities do not
necessarily transfer liabilities at the prices received to
assume them.
30-3 In many cases, the transaction
price will equal the fair value (for example, that might be
the case when on the transaction date the transaction to buy
an asset takes place in the market in which the asset would
be sold).
30-6 If another
Topic requires or permits a reporting entity to measure an
asset or a liability initially at fair value and the
transaction price differs from fair value, the reporting
entity shall recognize the resulting gain or loss in
earnings unless that Topic specifies otherwise.
35-3 A fair
value measurement assumes that the asset or liability is
exchanged in an orderly transaction between market
participants to sell the asset or transfer the liability at
the measurement date under current market conditions.
As discussed in earlier chapters, fair value represents an exit price under the
assumption that an asset is sold or a liability or equity instrument is transferred
(assumed) in an orderly transaction between unrelated market participants under
current market conditions. In many cases, the transaction price for an asset,
liability, or equity instrument equals its fair value on initial recognition.
However, in certain situations, it is not appropriate to assume that the transaction
price (which is an entry price) is the initial fair value (which is an exit price)
of an asset, liability, or equity instrument. That is, the entry price sometimes is
not the exit price.
Paragraph C26 of the Basis for Conclusions of FASB Statement 157
states the following regarding the exit price notion that underlies a fair value
measurement:
The transaction to sell the asset or transfer
the liability is a hypothetical transaction at the measurement date, considered
from the perspective of a market participant that holds the asset or owes the
liability. Therefore, the objective of a fair value measurement is to determine
the price that would be received for the asset or paid to transfer the liability
at the measurement date, that is, an exit price. The Board concluded that an
exit price objective is appropriate because it embodies current expectations
about the future inflows associated with the asset and the future outflows
associated with the liability from the perspective of market
participants.
Note that the guidance in ASC 820 on initial fair value measurement
only applies when other Codification topics require the initial recognition of an
asset, liability, or equity instrument at fair value (see Table 2-1). However, because other Codification topics often do not
require initial recognition at fair value, assets, liabilities, or equity
instruments may be initially recognized at their transaction price even if that
price differs from an exit price on initial recognition. Section 9.2 discusses the accounting in
situations in which an asset, liability, or equity instrument must be initially
recognized at fair value and the transaction price is not equal to the exit price on
initial recognition. See Section
10.2.7 for further discussion of the application of ASC 820 to
liabilities and instruments classified in an entity’s stockholders’ equity.