What Is ASC 820? Understanding the Fair Value Hierarchy

If your business holds investments, complex securities, or portfolio assets that need to be reported at fair value, you’ve probably run into the term ASC 820. The concept underneath it is fairly intuitive: what would this asset sell for, in an orderly sale between knowledgeable, willing parties, on a specific date?

What ASC 820 actually is

ASC 820 is the U.S. GAAP accounting standard that defines fair value, sets out how to measure it, and spells out what to disclose about it. It doesn’t decide what gets measured at fair value. Other standards make that call, and ASC 820 governs how the measuring gets done once they do.

It covers a lot of ground: portfolio investments and private equity holdings, the assets and liabilities recorded when one company acquires another, impairment testing for goodwill and other assets, and complex securities. Stock-based compensation is one notable exception. It follows its own rules under ASC 718, which we touch on in our 409A article.

Paraphrasing the standard, fair value is 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. A few pieces of that definition matter more than they might seem to at first read:

• +Exit price. It’s the price you’d receive to sell, not what you paid or what it would cost to buy. It also isn’t reduced for transaction costs like broker fees.
• +Orderly transaction means a normal sale with reasonable exposure to the market, not a fire sale or forced liquidation.
• +Market participants are hypothetical buyers and sellers who are independent of the company, knowledgeable, able, and willing to transact, not forced into it.
• +The market is the principal market for the asset, meaning the one with the most volume and activity that the company can access, or the most advantageous market if there isn’t a principal one.
• +Measurement date anchors the value to a specific point in time. Fair value isn’t a fixed, permanent number. It changes as markets and circumstances change.

This is what people mean when they say ASC 820 is a market-based measurement, not an entity-specific one. The question isn’t “what is this worth to us.” It’s “what would the market pay for this.”

The fair value hierarchy

ASC 820 sorts the inputs used to estimate fair value into three levels, based on how observable they are. This hierarchy shows up constantly in financial reporting, so it’s worth understanding what each level means.

Level 1: Quoted prices in active markets. This is the most reliable tier. Think publicly traded stock, where you can look up an actual, current trading price for the identical asset. When a Level 1 price exists, it’s generally used as is.

Level 2: Observable inputs, but not a quoted price for the identical asset. This might mean quoted prices for similar assets, quoted prices for identical assets in a market that isn’t as active, or other market data like interest rates and yield curves. Many corporate bonds and interest rate swaps fall here.

Level 3: Unobservable inputs. This is where there’s no reliable market data to lean on, so the valuation relies on assumptions. Those assumptions can start with the company’s own data, like its forecasts, but they still have to reflect what market participants would assume, not just management’s view. Private company equity, debt that rarely trades, and other illiquid investments frequently land here. Level 3 also draws the most judgment and scrutiny, since assumptions can vary and need stronger support.

How the level gets set

One detail trips people up: the hierarchy ranks inputs, not assets. A measurement is placed in the level of the lowest-level input that’s significant to the value as a whole. So a valuation built mostly on market data can still end up in Level 3 if one significant assumption can’t be observed. It’s also why similar holdings can land in different levels at different companies.

The hierarchy is a priority ranking. ASC 820 calls for using as much observable data as possible and as little unobservable data as possible, with Level 1 inputs at the top. What it isn’t is a grade on whether a valuation is right. Level 3 valuations aren’t necessarily wrong, but they carry a higher burden of support and disclosure because there’s less objective market evidence behind them.

Why this matters beyond the accounting department

For businesses, funds, trusts, and certain investors holding portfolio investments, private equity stakes, or complex securities, ASC 820 isn’t just a compliance exercise. It directly affects reported net asset value, investor reporting, and how defensible your numbers are if an investor, an auditor, or a regulator ever questions them. A well-supported Level 3 valuation, with clear documentation of the assumptions behind it, holds up. A vague one doesn’t.

Convertible debt, warrants, earnouts and other contingent consideration, and similar instruments regularly call for the same fair value discipline and the same hierarchy thinking, especially when they come out of a transaction or sit in a portfolio that doesn’t trade on any public market.

This article is a general overview for educational purposes only and is not tax, legal, accounting, or investment advice. Every situation is different, so talk with your advisors before making decisions. If you don’t have the right team in place, get in touch and we can help you get the right professionals on your team.

The bottom line

If your holdings fall in Level 3, your fair values rest on assumptions, and auditors and investors will test them. An independent ASC 820 valuation helps make sure your numbers hold up.

ProDelta Advisors provides fair value measurements under ASC 820 for portfolio investments, private equity holdings, complex securities, and family office and fund reporting needs.