Fair Value
The price to sell an asset or transfer a liability in an orderly transaction between market participants.
FAR tests this two ways. First, input classification: a fact pattern hands you a measurement technique and asks for the hierarchy level. The tell is whether the input is observable — a quoted price in an active market for the identical asset is Level 1; a quoted price for a similar asset, or an identical asset in an inactive market, drops to Level 2; an entity’s own internal cash-flow assumptions are Level 3. Second, which market: measure at the price in the principal market (greatest volume and activity for the item), and only when no principal market exists use the most advantageous market — and you do not deduct transaction costs from fair value (you weigh them only to identify which market is most advantageous).
The classic trap is confusing fair value with impairment mechanics: a long-lived asset held and used (ASC 360) first screens recoverability with undiscounted cash flows, but the write-down itself is measured to fair value. Another miss — for a nonfinancial asset, fair value assumes its highest and best use by market participants, not how the reporting entity actually uses or intends to use it.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →