Before 2007, companies didn’t have one clear rulebook for how to measure fair value. Each business had room to decide how it valued assets, how much detail to share, and when to recognize gains or losses.
This lack of consistency made financial statements hard to compare and easy to manipulate, and some companies took advantage of it.
A prime example of this is Enron, a large energy, commodities, and services company. On paper, Enron looked incredibly profitable. But in reality, it was hiding debt and losses in secret entities while showing investors profits that didn’t exist.
The company’s stock soared, employees poured their savings into it, and Wall Street trusted it. Until the truth came out. Almost overnight, Enron collapsed, wiping out billions in shareholder value and billions in employee pension benefits.
In 2007, a new accounting standard was introduced to solve this problem: ASC 820. It created a consistent definition of fair value and set rules for how companies must measure and disclose it.
In this article, I’ll walk you through what ASC 820 is, how it classifies assets, how to measure value under this standard, the fair value disclosure requirements companies must follow, and some of the common challenges that come up in practice.
Developed by the Financial Accounting Standards Board (FASB), ASC 820 is an accounting standard that gives companies a consistent way to define, measure, and report fair value in their financial statements. This ensures investors and other stakeholders can trust what’s being reported.
The standard is part of the U.S. Generally Accepted Accounting Principles (GAAP) and is also designed to align with international rules under IFRS, making financial reporting more comparable across borders.
ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
In plain language, fair value is what a buyer would actually pay for an asset, or what someone would require to take on a liability, in a regular, non-rushed transaction if both sides had the same information. The value is measured as of a specific date, not assumed to hold forever.
In practice, ASC 820 valuations are important for different stakeholders:
By standardizing how fair value is measured, ASC 820 ensures all stakeholders have the reliable information they need to make informed decisions.
Beyond defining fair value, ASC 820 also explains how to judge the quality of the inputs used to measure it. This system is called the fair value hierarchy, and it’s designed to make valuations more transparent.
The hierarchy ranks assets and liabilities based on liquidity, which refers to how quickly and easily they can be converted into cash at a price close to their market value.
Highly liquid assets, like stocks traded on the New York Stock Exchange (NYSE), have constant buyers and sellers, so their prices are clear and reliable.
Less liquid assets, like private company shares or complex derivatives, don’t trade often, making their value harder to pin down without enough market activity to guide the price.
To account for these differences, ASC 820 groups assets and liabilities into three levels, ranging from the most liquid items with directly observable inputs to the least liquid ones that rely more heavily on estimates.
The goal is to give anyone relying on financial statements a clearer picture of how much confidence they can place in a reported fair value.
To make this more concrete, here are the different ASC 820 levels, along with examples of assets that fall into each:
Level 1 assets and liabilities are the easiest to value. They rely on quoted prices in active markets for identical items, which makes them the most transparent and reliable.
Examples: Publicly traded stocks on the New York Stock Exchange (NYSE) and Nasdaq, or exchange-traded funds.
Assets or liabilities are classified as Level 2 when there are no quoted prices for the exact same item, but other observable market data is available. This may include prices of similar assets or inputs derived from market activity, such as yield curves or credit spreads.
Valuations here are less straightforward than Level 1 but still based on real market data.
Examples: Corporate bonds valued using credit spreads, real estate in active markets where comparable sales provide data points, or derivatives like interest rate swaps that are priced using observable inputs such as yield curves.
ASC 820 Level 3 assets and liabilities are the most difficult to measure because there’s little or no market data available. In these cases, companies rely on internal valuation models that are driven by their own assumptions about pricing.
These assumptions are called unobservable inputs, since they can’t be verified against market activity, which makes Level 3 valuations the most subjective.
Examples: Preferred stock in a private company, patents, or complex derivatives.
The process of ASC 820 fair value measurement usually involves two steps: first calculating the company’s enterprise value, then dividing that value across different share classes. Here are the main methods we rely on in each step:
This step is about estimating what the business is worth as a whole, including its equity, debt, and cash, which is what we call “enterprise value”.
To do this, here are the methods we use and when they make the most sense:
This method projects the company’s future cash flows and discounts them back to today’s value to account for risk and the time value of money.
It’s best for companies with steady or predictable earnings where we can reliably forecast performance and turn those projections into an accurate estimate of value.
Related Read: Understanding the Income Approach Valuation Method under ASC 820: A Comprehensive Guide
The market approach estimates value by looking at real-world data from comparable companies or transactions. We use it for companies that can’t reliably project long-term cash flows or haven’t completed a financing round in the past year.
In these cases, the income approach isn’t the best fit because it depends on predictable forecasts, so the market approach offers a more practical alternative.
Related Read: The Market Approach Valuation Method under ASC 820
Here are the main methods under this approach:
This values the company by adding up its assets and subtracting its liabilities. We use it for early-stage businesses that don’t yet generate reliable cash flow and don’t have enough comparable market data to support other methods.
Related Read: Understanding the Asset Approach Valuation Method under ASC 820: A Comprehensive Guide
Once enterprise value is calculated, the next step is to divide it among the company’s different share classes, such as common and preferred stock.
Several methods can be applied to make this allocation, depending on the company’s stage and capital structure:
This method distributes value based on the rights and liquidation preferences of each share class. In practice, it reflects how proceeds would actually flow to shareholders if the company were sold or went public.
Because of this, it’s most useful when a company has a complex cap table and is nearing a liquidity event such as an IPO or acquisition, where these preferences directly affect who gets paid and in what order.
The OPM treats each share class, such as common or preferred stock, like a call option; a right to buy something at a set price in the future.
In practice, this means the value of each share depends on potential future scenarios, such as an IPO, an acquisition, or the company remaining private. The method also factors in market volatility, timing, and shareholder rights.
Rather than assuming one outcome, OPM assigns probabilities across these scenarios and uses them to allocate the company’s total value among share classes. This makes it especially useful for early-stage startups with uncertain exit paths.
PWERM focuses on distinct exit outcomes, such as an IPO, a sale, or liquidation. For each scenario, it considers both the expected timing and the exit value, then assigns a probability to reflect how likely it is to occur.
The weighted outcomes are then averaged into a single expected value, which is then allocated across the company’s share classes.
This method is most useful when a company is approaching an exit and there’s enough visibility into specific timelines and anticipated exit values.
The CSE method assumes that all preferred shares convert into common stock, which is exactly what happens in an IPO.
By doing this, it strips away liquidation preferences and other special rights, showing ownership as if the company were already public.
This gives a straightforward way to allocate value across shares, making it especially useful when a company is preparing for an IPO.
Because the ultimate goal of ASC 820 is to ensure transparency, the standard sets rules for what must be disclosed in the financial statements. This gives investors, regulators, and other users enough detail to understand how values were determined and how reliable they are.
Key fair value disclosure requirements include:
ASC 820 fair value measurement can be complex, especially when it involves judgments around valuation inputs and assumptions.
Eton brings the experience and technical depth needed to make sure valuations are accurate, defensible, and presented clearly.
Our team has completed more than 10,000 valuations, bringing Big 4 rigor to work spanning straightforward Level 1 securities to complex Level 3 assets that rely on unobservable inputs.
That breadth of work means we know how to choose the right methods and document them in a way auditors respect and regulators recognize.
We also understand that deadlines for ASC 820 reporting are often tight. That’s why we deliver quickly, sometimes in as little as one business day, and explain results in plain language so they’re not just technically correct, but also useful for your team.
Most importantly, we don’t treat valuations as a checklist exercise. Every business has its own structure, risks, and goals, and we build that context into every report.
With Eton, ASC 820 fair value measurement becomes a process you can trust; precise enough for auditors, compliant for regulators, and clear enough for stakeholders who rely on the results.
Contact us today to get your ASC 820 valuation.
ASC Topic 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
In simple language, this is the price two informed, willing parties would agree on if they made a normal deal today, not a rushed or forced sale.
The fair value hierarchy ranks assets and liabilities by the reliability of the inputs used to measure them as we’ve discussed in this article.
Here are some fair value hierarchy examples:
Implementing ASC 820 can be difficult, especially for startups that are new to fair value reporting. Some common challenges include:
Because of these challenges, it’s important to work with a reliable ASC 820 valuation provider like Eton, who can ensure your valuations are accurate, defensible, and audit-ready.
Schedule a free consultation meeting to discuss your valuation needs.
Chris Walton, JD, is President and CEO and co-founded Eton Venture Services in 2010 to provide mission-critical valuations to private companies. He leads a team that collaborates closely with each client’s leadership, board of directors, internal / external counsel, and independent auditors to develop detailed financial models and create accurate, audit-ready valuations.
