FAS 157
And Fair Value Disclosures
Acct 592
Materials &
Labor
Markets
Manufacturer
Wholesale
Market
Consumer
Retail
Market
Dealer
2nd
Hand
Market
FASB’s Solution:
“highest and best use”
Unit of
Account
Unit of
Valuation
THE ASSET OR LIABILITY
Highest and
Best Use
Valuation
Premise
Exit Market
Market Participant
Assumptions
Attribute Value to Asset or Liability
at Unit of Account Level
Fair Value
Measurement
F/S Presentation and
Disclosure
Inputs to
Valuation Techniques
Indicated Value
Unit of Valuation
• The market in which the ENTITY would sell the asset
or transfer the liability
First Choice:
Principal market is the
Valuation
market with the
Premise
greatest volume and
level of activity for
asset or liability
Exit Market
Market Participant
Assumptions
If there is no principal
Highest and
market :
Best Use
Most advantageous market
maximizes the amount that
would be received for the
asset or minimizes the
amount that would be paid
to transfer the liability,
considering transaction
costs

If there is no principal market, use the most advantageous
market

Transactions costs are included in determining which market to
use but do NOT become part of the fair value measurement
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Market A
Selling price
Transaction cost
Net proceeds
Fair value to use
10
Market B
$50
$48
$5
$2
$45
$46
$48
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• A fair value measurement should be determined based on the
assumptions market participants would use in pricing the
asset or liability, including assumptions about (measurement)
risk, highest and best use (if asset), and nonperformance risk
(if liability)
Highest and
Best Use
Valuation
Premise
Exit Market
Market Participant
Assumptions
Market participants are
buyers and sellers in the
exit market (other entities
with whom the entity
would transact)
• The unit of valuation depends on the highest and
best use of the asset, which establishes the valuation
premise used to measure the fair value of the asset
In-use or
in-exchange
Valuation
Premise
Highest and
Best Use
Exit Market
Market Participant
Assumptions
Use by market
participants that
maximizes value
of asset (or asset
group)


In-use premise
 Provides maximum value through use in
combination with other assets
In-exchange premise
 Provides maximum value principally on a
stand-alone basis
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• The unit of valuation depends on the highest and
best use of the asset, which establishes the valuation
premise used to measure the fair value of the asset
In-use or
in-exchange
Valuation
Premise
Highest and
Best Use
Exit Market
Market Participant
Assumptions
Use by market
participants that
maximizes value
of asset (or asset
group)


An orderly transaction is a transaction that assumes exposure
to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities;
it is not a forced transaction (for example, a forced liquidation
or distress sale).
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Unit of
Account
Unit of
Valuation
THE ASSET OR LIABILITY
Highest and
Best Use
Valuation
Premise
Exit Market
Market Participant
Assumptions
Attribute Value to Asset or Liability
at Unit of Account Level
Fair Value
Measurement
F/S Presentation and
Disclosure
Inputs to
Valuation Techniques
Indicated Value
Unit of Valuation
A change in valuation technique is a change in
accounting estimate, not a change in accounting
principle
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
Developed based on market data obtained from sources
independent of the reporting entity

Developed based on the best information available in the
circumstances, subject to cost-benefit constraint
A fair value
measurement should
maximize the use of
observable inputs
From:
Refining Fair Value
Measurement,
Miller, Paul B. W.;
Bahnson, Paul R..
Journal of Accountancy,
Nov2007, Vol. 204 Issue 5,
p30-36,
Level 1
Quoted prices in active markets for identical
assets/ liabilities (unadjusted); no blockage
factors (Price x Quantity)
Level 2
Other observable inputs—include quoted prices
for similar assets/ liabilities (adjusted) and
market-corroborated inputs
Level 3
Unobservable inputs—entity’s own assumptions
about market participant assumptions, including
assumptions about risk, developed based on the
best information available in the circumstances
(subject to cost-benefit constraint); might include
the entity’s own data
Unit of
Account
Unit of
Valuation
THE ASSET OR LIABILITY
Highest and
Best Use
Valuation
Premise
Exit Market
Market Participant
Assumptions
Attribute Value to Asset or Liability
at Unit of Account Level
Fair Value
Measurement
F/S Presentation
and Disclosure
Inputs to
Valuation Techniques
Indicated Value
Unit of Valuation

Tabular display reconciles beginning and ending amounts
when significant Level 3 inputs are used
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