Author: Frances Franco, CPA, CFF, CVA : SingerLewak LLP
Financial statements were once based primarily on historical costs. However, under certain circumstances, fair value accounting is the reporting standard.
The objective of a fair value measurement is to estimate the price to sell an asset or transfer a liability assuming an orderly transaction between market participants. Fair value is defined as “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” A business combination is an example of the application of fair value measurement to individual assets or liabilities. In a business combination, the specific assets and liabilities of the acquired entity are measured at individual fair values as of the date of the change of control in the transaction.
Fair value is also the bench mark to test assets, including intangibles, for impairment. The following are examples of intangible assets: Trademarks, brand names, service marks, plays, books, and customer lists. Valuation techniques which are consistent with the market, income and/or cost approach are used to measure fair value.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update titled “Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The primary objective of this Update is to improve the effectiveness of financial statement disclosures in the notes to the financial statements. This Update applies to all entities that are required by Generally Accepted Accounting Principles (“GAAP”) to make disclosures about recurring or nonrecurring fair value measurements. However, it is important to note that certain disclosures required by this Update are not required for nonpublic entities.
The Update impacts the following disclosures:
- Transfers between levels
- The valuation process for “Level 3” fair value measurement
- Changes in unrealized gains and losses
- The timing of liquidation of an investee’s assets
- Communication about the uncertainty in measurement
The above is an example of areas impacted by the Update on fair value measurement disclosures and not intended to be all inclusive. It is recommended that the full Update be reviewed to ensure full compliance. See link of ASU 2018-13 below. The amendments to the Fair Value measurement disclosures are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.