Fair Value Measurements: Valuation Principles and Auditing Techniques (Portfolio 5127)

For a considerable time, standard setters (i.e., the Financial Accounting Standards Board, or FASB, and its predecessors) have either permitted or required reporting entities to use fair value measurements in specific instances, as the concept of fair value measurements is found throughout the professional literature. In 2006, the FASB issued a comprehensive set of principles to guide in the measurement of fair values. Those principles are in FASB Accounting Standards Codification (ASC) Topic 820-10. ASC 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The FASB's rationale for creating these fair value measurement principles was to create consistency among reporting entities that use fair value measurements and to improve the reliability of those measurements. International Financial Reporting Standards (IFRS) have generally converged guidance with U.S. GAAP on fair value measurement, which is in IFRS 13.

This Portfolio defines fair values, explains the instances in which they are used in financial reporting, and illustrates their application to assets and liabilities in the context of the fair value measurement principles. First, a review of accounting measurement theory and its relationship to fair value measurement is provided. Second, ASC 820, including the definition and premise of fair value, valuation techniques, the fair value hierarchy, and fair value disclosures, is discussed. Valuation approaches are then presented and illustrated. The portfolio concludes with discussion on measuring fair value during a crisis, using the fair value, measuring fair value under IFRS, and identifying key auditor considerations.

This Portfolio may be cited as Bloomberg Tax & Accounting Portfolio 5127-4^th, Kohlbeck, Fair Value Measurements and Valuation Principles.