Rule Atlas
FASB ASC 820: Fair Value Measurement: A Deep Dive into ASC 820
Under FASB ASC 820 (AICPA / FASB / IRS), fair Value Measurement: A Deep Dive into ASC 820 establishes the authoritative rules tested on the CPA Exam. A world-class guide to mastering fair value measurement under FASB ASC 820. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Current Statutory Thresholds & Limits in Effect
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Worked Example: Finding the Most Advantageous Market
| Market | Quoted Price | Transaction Costs | Transportation Costs |
|---|---|---|---|
| Market A | $100,000 | $5,000 | $2,000 |
| Market B | $102,000 | $8,000 | $3,000 |
An entity's controller is reviewing the valuation of several financial instruments for year-end reporting. The valuation process involves a variety of inputs, ranging from quoted prices in active markets to internal cash flow projections. According to the FASB Conceptual Framework and related standards on fair value measurement, what is the primary objective of establishing the fair value hierarchy (Level 1, 2, and 3 inputs)?
Worked Example: Finding the Most Advantageous Market
Scenario: An entity holds a specialized piece of equipment that can be sold in two different markets, Market A and Market B. There is no principal market for this equipment.
- | Market | Quoted Price | Transaction Costs | Transportation Costs | | :--- | :--- | :--- | :--- | | Market A | $100,000 | $5,000 | $2,000 | | Market B | $102,000 | $8,000 | $3,000 |
- Step 1: Calculate the net price for each market. The formula is Net Price = Market Price - Transaction Costs - Transportation Costs. Market A Net Price: $100,000 - $5,000 - $2,000 = $93,000 Market B Net Price: $102,000 - $8,000 - $3,000 = $91,000
- Step 2: Identify the most advantageous market. Market A provides the higher net price ($93,000 vs. $91,000), so it is the most advantageous market.
- Step 3: Determine the fair value measurement. The fair value is the price in the most advantageous market, before deducting transaction costs, but after adjusting for transportation costs because location is an attribute of the equipment. Fair Value: $100,000 (Price in Market A) - $2,000 (Transportation Costs) = $98,000.
Common CPA Exam Distractors on FASB ASC 820
- 1Use this systematic approach to deconstruct any fair value question on the exam:
- 2Step 1. Identify the Market. First, determine if a principal market (greatest volume and activity) exists. If so, you must use the price from that market. If not, find the most advantageous market (maximizes net proceeds).
- 3Step 2. Calculate the Fair Value Price. Remember the rule: the fair value is the market price in the selected market, adjusted for transportation costs (if location is an attribute of the asset), but never for transaction costs.
- 4Step 3. Select the Valuation Technique. Based on the asset, determine if the Market, Income, or Cost approach is most appropriate. The question's facts will point you to the right technique (e.g., mentioning cash flow projections implies the Income approach).
- 5Step 4. Analyze the Inputs. Scrutinize the data used in the valuation. Are they quoted prices for identical assets (Level 1), other observable data like interest rates (Level 2), or internal, unobservable assumptions (Level 3)?
Frequently Asked Questions: FASB ASC 820
What is the core rule under FASB ASC 820 (Fair Value Measurement: A Deep Dive into ASC 820)?
Under FASB ASC 820 (AICPA / FASB / IRS), fair Value Measurement: A Deep Dive into ASC 820 establishes the authoritative rules tested on the CPA Exam. A world-class guide to mastering fair value measurement under FASB ASC 820. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
How is FASB ASC 820 tested on the CPA Exam?
Use this systematic approach to deconstruct any fair value question on the exam: Step 1. Identify the Market. First, determine if a principal market (greatest volume and activity) exists. If so, you must use the price from that market. If not, find the most advantageous market (maximizes net proceeds).
Where can I practice CPA Exam questions on Fair Value Measurement: A Deep Dive into ASC 820?
Test yourself instantly with the free playable CPA Exam question on this page, or launch VoraPrep's full CPA Exam adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cpa.