{"id":15456,"date":"2021-05-28T14:53:03","date_gmt":"2021-05-28T19:53:03","guid":{"rendered":"https:\/\/sfwpartnersllc.com\/?p=15456"},"modified":"2021-05-28T14:53:03","modified_gmt":"2021-05-28T19:53:03","slug":"whats-fair-value-in-an-accounting-context","status":"publish","type":"post","link":"https:\/\/www.sfw.cpa\/news-and-guides\/whats-fair-value-in-an-accounting-context\/","title":{"rendered":"What\u2019s \u201cFair Value\u201d in an Accounting Context?"},"content":{"rendered":"

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In recent years, the accounting rules for certain balance sheet items have transitioned from historical cost to \u201cfair value.\u201d Examples of assets that may currently be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination. Though fair value may better align your company\u2019s financial statements with today\u2019s market values, estimating fair value may require subjective judgment.<\/p>\n

GAAP definition<\/strong><\/p>\n

Under U.S. Generally Accepted Accounting Principles (GAAP), fair value is \u201cthe price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.\u201d Accounting Standards Codification Topic\u00a0820, Fair Value Measurements and Disclosures<\/em>, explains how companies should estimate the fair value of assets and liabilities by using available, quantifiable market-based data.<\/p>\n

Topic\u00a0820 provides the following three-tier valuation hierarchy for valuation inputs:<\/p>\n

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  1. Quoted prices in active markets for identical<\/em> assets or liabilities,<\/li>\n
  2. Information based on publicly quoted prices, including older prices from inactive markets and prices of comparable stocks, and<\/li>\n
  3. Nonpublic information and management\u2019s estimates.<\/li>\n<\/ol>\n

    Fair value measurements, especially those based on the third level of inputs, may involve a high degree of subjectivity, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.<\/p>\n

    Auditing estimates<\/strong><\/p>\n

    Auditing standards generally require auditors to select one or a combination of the following approaches to substantively test fair value measurements:<\/p>\n

    Test management\u2019s process.<\/strong> Auditors evaluate the reasonableness and consistency of management\u2019s assumptions, as well as test whether the underlying data is complete, accurate and relevant.<\/p>\n

    Develop an independent estimate.<\/strong> Using management\u2019s assumptions (or alternate assumptions), auditors come up with an estimate to compare to what\u2019s reported on the internally prepared financial statements.<\/p>\n

    Review subsequent events or transactions.<\/strong> The reasonableness of fair value estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor\u2019s report.<\/p>\n

    Outside input<\/strong><\/p>\n

    Measuring fair value is outside the comfort zone of most in-house accounting personnel. Fortunately, an outside valuation expert can provide objective, market-based evidence to support the fair value of assets and liabilities. Contact us for more information.<\/p>\n

    \u00a9 2021<\/em><\/p>\n

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    \n<\/html><\/p>\n","protected":false},"excerpt":{"rendered":"

    In recent years, the accounting rules for certain balance sheet items have transitioned from historical cost to \u201cfair value.\u201d Examples of assets that may currently be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination. Though fair value may better align your company\u2019s financial statements with today\u2019s […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15456","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15456","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15456"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15456\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15456"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15456"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15456"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}