A company holds a bond at the reporting date. A pricing service supplies a number, an observable yield curve supports part of the estimate, and management adjusts expected cash flows for facts that other market participants would consider. Is that number fair value? Which market matters? Which hierarchy level describes the complete measurement? Start with the accounting requirement, not the level label.
Learn the measurement before you classify the inputs
Read this page from scope through disclosure. Open measurement basis before deciding why fair value applies. Then use fair value measurement objective, principal market, fair value valuation approaches, and fair value hierarchy as the definitions for the corresponding sections.
After the chapter, read Control fair value and release the portfolio to see how a completed measurement enters a broader investment close. The Northline bond later on this page is a worked example. The warehouse and research tasks are optional independent practice.
Follow the measurement before naming the level
ASC 820 supplies one measurement framework for many assets and liabilities. Another Topic usually decides whether fair value applies and how the resulting change enters the financial statements. Preserve that division of work as you move from scope to disclosure.
Build the measurement in six connected decisions
Open a stage to see the question, evidence, and related practice.
- Confirm fair value applies Identify the Topic that requires or permits fair value and preserve its scope and unit of account.
- Define the measurement Name the asset or liability, measurement date, characteristics, and market-participant assumptions.
- Identify the market Find the principal market, confirm access, and keep transaction costs separate from the exit price.
- Choose a valuation approach Use the market, income, or cost approach that fits the item and available evidence.
- Classify the inputs Inventory observable and unobservable inputs, then identify the lowest-level significant input.
- Explain and disclose Tie the amount, technique, inputs, hierarchy level, uncertainty, and required disclosures together.
Find the requirement that sends you to fair value
ASC 820 explains how to measure fair value when another Topic requires or permits it. It does not decide whether the company must measure a trading security, an impaired asset, acquired identifiable assets, a derivative, or a stock award at fair value. Begin with the governing Topic and the measurement basis it requires.
Record whether the measurement is initial or subsequent, recurring or nonrecurring, and required or elected. Also record the unit of account supplied by the governing guidance. A quoted price for one share cannot answer a question about a different accounting unit without further analysis.
Once scope and the unit of account are settled, apply the fair value measurement objective. ASC 820-10-35-2 requires an estimate of the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Describe the item, date, and market participants
Fair value is a current exit-price measurement. It is not the entity's historical cost, a forced-sale amount, or the price management hopes to receive. The measurement reflects assumptions that market participants would use under the stated market conditions.
ASC 820-10-35-2B requires the entity to consider characteristics of the asset or liability that market participants would consider. Those characteristics can include condition, location, and restrictions that are attributes of the item. Keep the measurement date visible because markets, rates, and facts can change after that date.
With the item and date fixed, identify the market in which the assumed transaction occurs. Do not choose a market merely because it produces the best number.
Use the principal market the entity can access
The principal market is the market with the greatest volume and level of activity for the asset or liability. If no principal market exists, the applicable analysis moves to the most advantageous market. ASC 820-10-35-5A does not require an exhaustive search, but the entity must consider information that is reasonably available. Under ASC 820-10-35-6A, the entity must be able to access the selected market at the measurement date.
Transaction costs do not change the fair value price under ASC 820-10-35-9B because they are not a characteristic of the asset or liability. Transport costs can be different when location is a characteristic of the asset. Keep those costs in separate workpaper rows so one adjustment does not hide the other.
The selected market and market-participant assumptions now set the stage for a valuation technique. The technique must translate available evidence into the exit-price objective.
Match the valuation approach to the evidence
The fair value valuation approaches organize the evidence. A market approach uses prices and other information from market transactions involving identical or comparable items. An income approach converts future amounts, such as cash flows, into one current amount. A cost approach reflects the current amount needed to replace an asset's service capacity.
ASC 820-10-35-24A directs the technique toward an orderly transaction between market participants at the measurement date under current market conditions. The entity must support the chosen technique and apply it consistently unless a change produces a measurement that better represents fair value under the facts.
ASC 820-10-35-36 requires valuation techniques to maximize relevant observable inputs and minimize unobservable inputs. That instruction does not ban unobservable inputs. It requires the entity to use the strongest relevant market evidence that is reasonably available.
Classify the measurement by its lowest-level significant input
The fair value hierarchy ranks inputs, not assets, liabilities, risk, or management quality. ASC 820-10-35-37 gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
| Input level | Question you must answer | Common evidence |
|---|---|---|
| Level 1 | Is this an unadjusted quoted price in an active market for the identical item that the entity can access? | Direct quoted price for the identical item at the measurement date |
| Level 2 | Is the input observable directly or indirectly, but not a qualifying Level 1 price? | Prices for similar items, observable yield curves, or market-corroborated inputs |
| Level 3 | Is the input unobservable for the asset or liability? | Supported market-participant assumptions when relevant observable evidence is unavailable |
Under ASC 820-10-35-37A, classify the complete measurement from its lowest-level significant input. A valuation that combines an observable yield curve with a significant unobservable cash-flow adjustment is Level 3. A number copied from a screen is not automatically Level 1 when it concerns a similar item, an inactive market, or an adjusted price.
Level 3 does not mean that the asset is poor quality or that the estimate is wrong. Test that distinction with Why Level 3 does not rank the asset.
Read each column in a filed hierarchy table
Apple Inc.'s 2025 Form 10-K reports financial-instrument information for the year ended September 27, 2025. Note 3 presents cash, cash equivalents, and marketable securities by significant investment category. It separates adjusted cost, unrealized gains and losses, fair value, financial-statement location, and Level 1 or Level 2 inputs. The amounts are reported in millions of US dollars.
Choose one security category and trace it across the table. First identify the security class. Then distinguish adjusted cost from fair value and locate the hierarchy column. Ask what input evidence could support that level. Do not infer the accounting location of a fair-value change from the hierarchy label.
The filing establishes what Apple reported and how it organized the disclosure. It does not provide every control, pricing-service record, market-access conclusion, or significant-input assessment behind the reported level. Read Apple's complete 2025 Form 10-K and locate Note 3 before drawing a conclusion.
Connect the amount to its disclosure trail
ASC 820-10-50-2 requires information by class for assets and liabilities measured at fair value. The applicable disclosure depends in part on whether the measurement is recurring or nonrecurring and where it falls in the hierarchy. Level 3 measurements can require added information about techniques, inputs, activity, and uncertainty.
A release-ready conclusion states the governing Topic, item and unit of account, measurement date, market, market participants, technique, significant inputs, hierarchy level, amount, financial-statement effect, disclosures, and unresolved evidence. The hierarchy conclusion is one line in that chain.
Study the worked measurement before you practice
Worked example: The Northline bond example keeps scope, market, technique, inputs, arithmetic, hierarchy, and release evidence in one file. Its $975,000 result is code-checked; the supplied valuation assumptions remain separate from that arithmetic.
After you can explain every decision in Northline, use the following optional practice to transfer the method.
Optional practice
Transfer the path to a warehouse
Preserve a different Topic's measurement requirement while applying the market and hierarchy decisions.
Optional practice
Build a reproducible ASC 820 research trail
Find the paragraphs behind each decision and record what remains unresolved.
Optional practice
Release a supported hierarchy conclusion
Classify supplied inputs and retain evidence owners and unresolved exceptions.
Cumulative case
Control a mixed investment portfolio
Connect instrument scope, measurement layers, fair value, reporting location, and disclosure.
For the fuller investment sequence, continue through Investments, fair value, and the equity method. Review the dated ASC 820 source record for the paragraph families, standards clock, and limitations behind this instruction.
Carry the measurement into the next reporting decision
You can now explain why fair value applies, what item and date are measured, which market and technique support the exit price, which inputs are significant, and what the hierarchy level communicates. Return to Complete every accounting decision when the recognition, measurement, presentation, or disclosure question becomes unclear. Return to Understanding the ASC when you want another Topic route.