Guides
ASC 820: Fair Value Measurement, Explained
ASC 820 is the FASB standard that defines fair value and sets one consistent framework for measuring it across U.S. GAAP. Fair value is an exit price: the amount an entity would receive to sell an asset, or pay to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 does not decide what gets measured at fair value; other standards do that. It governs how you measure it and what you disclose.
The standard applies whenever another codification topic requires or permits fair value, including business combinations under ASC 805, impairment testing, most financial instruments, and crypto assets under ASU 2023-08. Its three-level input hierarchy and Level 3 disclosures are where most of the audit scrutiny lands.
What fair value means under ASC 820
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. It is a market-based exit price, not an entry price and not a forced-sale price. The reference market is the principal market for the asset, or absent one, the most advantageous market.
Three features define the measurement. First, it is market-based, so it reflects assumptions market participants would use, not the entity’s own intentions. Second, it assumes an orderly transaction with normal marketing exposure, not a distressed or liquidation sale. Third, for a nonfinancial asset, fair value assumes the asset’s highest and best use by market participants, which may differ from how the current owner uses it.
The unit of account (whether an asset is measured individually or as part of a group) is set by the standard that requires the fair value measurement, not by ASC 820. ASC 820 supplies the definition and the method; the referring standard supplies the “what.”
The fair value hierarchy: Level 1, 2, and 3
ASC 820 ranks the inputs to a fair value measurement into three levels by how observable they are. Level 1 inputs are the most reliable (quoted prices in active markets), and Level 3 inputs are the least (unobservable, model-driven). A measurement is classified in its entirety at the lowest level of any input that is significant to the whole measurement.
The level reflects the inputs, not the valuation technique. A discounted cash flow model built entirely on observable market rates can still land in Level 2, while the same model using a company-specific growth assumption falls to Level 3. Classification drives the disclosures required, so the boundary between Level 2 and Level 3 is often the most debated judgment in the analysis.
| Level | Input type | Examples | Reliability | Typical assets |
|---|---|---|---|---|
| Level 1 | Quoted (unadjusted) prices in active markets for identical assets or liabilities | Closing price of a listed stock; exchange-traded fund; U.S. Treasury quote | Highest; no judgment | Public equities, listed derivatives, money market funds |
| Level 2 | Observable inputs other than Level 1 quotes, directly or indirectly | Quoted prices for similar assets; quotes in inactive markets; yield curves, interest rates, credit spreads, benchmark prices | Moderate; some judgment | Corporate bonds, interest rate swaps, most mortgage-backed securities |
| Level 3 | Unobservable inputs based on the entity’s own assumptions | Internal DCF projections, private company multiples, discount rates, volatility, illiquidity discounts | Lowest; significant judgment | Private equity, complex derivatives, early-stage warrants, hard-to-value intangibles |
The three valuation techniques
ASC 820-10-35-24A directs entities to use one or more of three valuation approaches: the market approach, the income approach, and the cost approach. The chosen technique should maximize observable inputs and minimize unobservable ones, and it should be applied consistently once selected, changing only when a different technique produces a more representative measurement.
The market approach uses prices and other information from market transactions in identical or comparable assets. It underlies Level 1 measurements and many Level 2 ones, and it appears in private company work as guideline public company or transaction multiples (for example, an EV/EBITDA multiple applied to a target).
The income approach converts future amounts, usually cash flows or earnings, into a single present value through discounted cash flow or option pricing models. It is common for Level 3 assets where no direct market price exists, such as intangibles recognized in an acquisition or contingent consideration.
The cost approach measures the amount required to replace the service capacity of an asset, often described as current replacement cost adjusted for obsolescence. It fits tangible assets like specialized machinery or property with no active resale market and is the least common of the three for financial reporting.
Disclosure requirements
ASC 820 requires disclosures that let users assess the valuation techniques and inputs behind fair value measurements, with the depth scaling to the hierarchy level. Level 3 measurements carry the heaviest burden because they rely on unobservable, entity-developed inputs. Disclosures separate recurring measurements (remeasured every period) from nonrecurring ones (triggered by events like impairment).
Core disclosures across all levels include:
- Amounts by level. The fair value at the reporting date and the level of the hierarchy for each class of asset and liability.
- Transfers. Amounts of transfers between Level 1 and Level 2, and the reasons for them, with a stated policy for timing.
- Valuation technique and inputs. For Level 2 and Level 3, the technique used (market, income, or cost) and the inputs applied, such as discount rates, credit spreads, or price multiples.
- Level 3 quantitative detail. The significant unobservable inputs, presented as ranges or weighted averages, and a description of the valuation process.
- Level 3 rollforward. A reconciliation of opening to closing balances showing purchases, sales, settlements, issuances, and gains or losses split between realized and unrealized.
- Sensitivity narrative. For recurring Level 3 measurements, a description of how the measurement would change for changes in unobservable inputs, including any interrelationships between them.
Private companies and certain nonpublic entities receive scaled relief from some Level 3 requirements, including the rollforward and the sensitivity narrative, so the exact package depends on entity type. The requirements sit in ASC 820-10-50 within the FASB Accounting Standards Codification.
Fair value vs book value
Fair value and book value answer different questions. Book value is a historical, cost-based carrying amount on the balance sheet (original cost less accumulated depreciation or amortization). Fair value is a current, market-based exit price at the measurement date. For a public stock the two can diverge sharply; for a recently acquired asset they may start equal, then drift apart as markets move.
The distinction matters in acquisition accounting and impairment. When one company buys another, ASC 805 requires acquired assets and liabilities to be recorded at ASC 820 fair value, not the seller’s book value, and the gap often creates goodwill. Later, impairment tests compare a carrying amount to a fair-value-based measure to decide whether a write-down is needed.
Frequently asked questions
Is ASC 820 the same as fair value accounting?
No. ASC 820 does not require anything to be measured at fair value. It defines fair value and provides the measurement framework and disclosures. Other standards, such as ASC 805 for business combinations, ASC 321 for equity securities, and ASU 2023-08 for crypto, decide which items are measured at fair value. ASC 820 then governs how that measurement is performed and reported.
What is the difference between Level 2 and Level 3?
Level 2 measurements rely on observable inputs other than quoted prices, such as benchmark yields, credit spreads, or quotes for similar assets. Level 3 measurements rely on unobservable inputs that reflect the entity’s own assumptions, like internal cash flow forecasts or private company discount rates. When a significant input cannot be corroborated by market data, the whole measurement drops to Level 3 and triggers expanded disclosures.
Does ASC 820 apply to private companies?
Yes. ASC 820 applies to all entities under U.S. GAAP whenever another standard requires or permits fair value, including private companies. Nonpublic entities do receive scaled disclosure relief, such as an exemption from the Level 3 rollforward and the quantitative sensitivity narrative in many cases. The measurement rules themselves are the same regardless of entity type.
What is an exit price?
An exit price is the amount received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It contrasts with an entry price, the amount paid to acquire an asset. ASC 820 defines fair value strictly as an exit price in the principal (or most advantageous) market, even when the entity has no intention to sell.
How is fair value different from the international standard?
FASB’s ASC 820 and the IASB’s IFRS 13 are substantially converged. Both define fair value as an exit price, use the same three-level input hierarchy, and rely on the market, income, and cost approaches. Differences are mostly in scope details and certain disclosures rather than the core definition, so a Level 3 measurement under one framework generally looks similar under the other.
What triggers a Level 1 to Level 2 transfer?
A transfer occurs when the observability of an asset’s inputs changes. An asset moves from Level 1 to Level 2 when its market stops being active, so a quoted price is no longer readily available for the identical instrument, and pricing shifts to observable proxies. Entities must disclose the amounts of such transfers, the reasons, and apply a consistent policy for when transfers are recognized.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.