Question

ASC 820 FAIR VALUE HIERARCHY

1. which pricing method should use in level 1 of fair value hierarchy? Either broker quote or vendor price? WHY?

2. how this pricing methods can affect the risk assessment?

Answer 1

ASC 820 is an updated FASB codification. It defines fair value as the price that will be received if an asset is sold or transferred to pay a liability in an orderly transactions.

Fair value hierarchy categories the inputs that are used in valuation techniques in three levels. It gives highest priority to quoted prices for the identical assets and liabilities in the active markets. It gives lowest priority to the unobservable inputs.

1) The pricing method that should be used in level 1 of fair value hierarchy is the quoted prices( that is unadjusted ) in the active markets. These price are accessible by the reporting entity at the measurement date. This price is used as as these provides most reliable evidence of fair value. These are reliable and should be used to measure the fair value whenever applicable.

2) Risk assessment is a process to identify risks, analyze and evaluate it and determining the effective ways to eliminate it. It is an integral part of management plan.This pricing method can affect the risk assessment.