Browse Financial Accounting and Reporting (FAR)

Fair Value Measurement and Disclosure

FAR coverage for ASC 820 fair value definition, valuation approaches, hierarchy levels, and measurement disclosures.

Fair value appears across FAR because many assets, liabilities, impairments, financial instruments, business combinations, and disclosure notes depend on current market-based measurement. ASC 820 does not tell an entity when to use fair value. It explains how to measure fair value once another standard requires or permits it.

The exam focus is usually practical: identify the exit price, choose a defensible valuation approach, classify inputs in the fair value hierarchy, and recognize when Level 3 judgment requires heavier disclosure. The same fact pattern may test both measurement and note disclosure.

In This Chapter

Lesson Main question What to master
Fair Value Definition and Valuation Approaches What price is being measured, and what valuation approach fits the asset or liability? Exit price, market participant assumptions, principal or most advantageous market, and market, cost, and income approaches
Fair Value Hierarchy Levels 1, 2, and 3 How observable are the inputs used in the valuation? Level 1 quoted prices, Level 2 observable inputs, Level 3 unobservable inputs, and transfers between levels
Fair Value Measurement Disclosure Requirements What must users be told about the measurement? Recurring versus nonrecurring measurements, valuation techniques, hierarchy levels, Level 3 roll-forwards, and significant inputs

Measurement Logic

    flowchart TB
	    A["Another GAAP topic requires or permits fair value"] --> B["Identify the unit of account and measurement date"]
	    B --> C["Use market participant assumptions"]
	    C --> D["Select valuation approach: market, cost, or income"]
	    D --> E["Maximize observable inputs"]
	    E --> F["Classify the measurement in Level 1, Level 2, or Level 3"]
	    F --> G["Provide disclosures based on recurrence and input subjectivity"]

The hierarchy classification is driven by the lowest-level input that is significant to the measurement. A model that includes a significant unobservable assumption is not Level 1 merely because some market data is used.

Fair Value Classification Checkpoints

Checkpoint What to determine Exam consequence
Measurement authority Which GAAP topic requires or permits fair value for the item. ASC 820 explains measurement, not whether the item must be measured at fair value.
Market assumption Principal market, most advantageous market, and market participant assumptions. The measurement is an exit price, not an entity-specific intent price.
Valuation approach Market, cost, or income approach based on the asset, liability, and available inputs. The approach should fit the item being measured and the evidence available.
Input observability Whether significant inputs are quoted, observable, corroborated, or unobservable. The lowest significant input drives hierarchy classification.
Disclosure burden Whether the measurement is recurring, nonrecurring, Level 3, or based on changed techniques or transfers. More judgment and less observability generally require more explanation.

How to Use This Chapter

  • First ask whether the question is about recognition under another standard or measurement under ASC 820.
  • Treat fair value as an exit price, not the amount originally paid.
  • Classify inputs by observability before deciding the hierarchy level.
  • Remember that Level 3 does not mean “wrong” or “unusable”; it means significant unobservable inputs require more explanation.
  • Return here whenever a FAR miss involves valuation methods, Level 1, Level 2, Level 3, recurring measurements, nonrecurring measurements, or fair value disclosures.

In this section

Revised on Monday, June 15, 2026
21. Income Taxes
23. Leases