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Worked-example setupScope and assumptions
- Northline and the bond are fictional; the accounting scope, market, valuation, significance, and disclosure facts are supplied for instruction.
- ASC 320 requires the single available-for-sale bond to be reported at fair value at December 31, 2026; this example does not establish that classification.
- Northline can access the dealer market at the measurement date, and that market has the greatest volume and level of activity for this bond.
- A pricing specialist selected an income approach and supplied a $1,040,000 value from observable benchmark rates and market-corroborated credit spreads.
- A $65,000 downward cash-flow adjustment for the bond's unusual prepayment feature is unobservable and significant to the complete measurement.
- Northline accounts for the supplied $8,000 transaction cost separately; it does not adjust fair value.
- Period
- December 31, 2026
- Units
- US dollars
- Rounding
- Whole dollars; no rounding required
Start with the reporting requirement
The supplied ASC 320 conclusion requires Northline to report one available-for-sale bond at fair value on December 31, 2026. That conclusion settles why fair value applies and identifies the unit of account. ASC 820 now governs how Northline measures the amount.
Trading evidence identifies the dealer market as the bond's principal market, and Northline can access it on the measurement date. A different market offers a slightly better net price, but that does not replace the principal market.
Trace the technique and every significant input
The pricing specialist uses an income approach. Observable benchmark rates and market-corroborated credit spreads produce a model amount of $1,040,000. Those inputs can support Level 2 input classifications under the stated facts.
An unusual prepayment feature also affects the bond. The specialist reduces the modeled cash flows by $65,000 using an unobservable market-participant assumption. Under the supplied significance assessment, this adjustment is significant to the complete measurement.
observable model amount $1,040,000
significant unobservable adjustment (65,000)
----------
fair value $975,000
The supplied $8,000 transaction cost stays outside this calculation. It is not a characteristic of the bond and does not adjust the fair value price.
Classify the complete measurement
The $975,000 measurement is Level 3 because its lowest-level significant input is the unobservable prepayment adjustment. Observable rates do not make the complete measurement Level 2. A Level 3 conclusion also does not say that the bond has poor credit quality or that the valuation failed.
Northline's file still needs the ASC 320 reporting bridge and the applicable ASC 820 disclosures. The release record should retain the governing Topic, measurement date, principal-market evidence, technique, input sources, significance conclusion, $975,000 result, hierarchy level, transaction-cost treatment, controls, and open exceptions.
Verified calculation · scoped sums
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- amounts
- 2 fields
Inspect data
{
"observable_model_amount": 1040000,
"significant_unobservable_adjustment": -65000
}- totals
- 1 field
Inspect data
{
"fair_value": [
"observable_model_amount",
"significant_unobservable_adjustment"
]
}Recomputed result
| Measure | Value |
|---|---|
| fair value | 975,000 |