Fair value valuation approaches

A valuation approach organizes evidence into a fair value estimate. The market approach uses prices and other information from transactions involving identical or comparable items. The income approach converts future amounts, such as cash flows, into one current amount. The cost approach reflects the current amount needed to replace an asset's service capacity.

Choose the technique that fits the item and evidence

ASC 820-10-35-24A directs a valuation technique toward the Topic's exit-price objective under current market conditions. The technique must fit the characteristics of the item and the evidence that is reasonably available. A familiar model is not sufficient when it answers a different measurement question.

Apply the technique consistently. Change it when the new technique or weighting better represents fair value under the circumstances. Retain the reason, date, inputs, controls, and effect of the change.

Inventory inputs before assigning a hierarchy level

ASC 820-10-35-36 gives priority to relevant observable evidence and reduces reliance on unobservable assumptions. The rule does not prohibit a supported unobservable input. It prevents the entity from ignoring stronger relevant market evidence.

List each price, rate, cash flow, volatility assumption, adjustment, and other input. Record its source, date, observability, and significance. Only then can you apply the fair value hierarchy to the complete measurement.