transaction.” Unlike U.S.

GAAP, the IFRS definition and explanation of fair

value is spread out among several standards. However, as noted earlier, the

IASB is working on an exposure draft on fair value measurement guidance

that will serve as a counterpart to SFAS 157.

Fair value, as the term is used throughout this book, can be applied

with respect to any of the following eight categories:

1. One specific asset

2. A group of assets

3. A specific liability

4. A group of liabilities

5. A net consideration of one or more assets less one or more related

liabilities

6. A segment or division of an entity

7. A particular location or region of an entity

8. An entire entity

The guidance on fair value issues in SFAS 157 is rather extensive in

comparison to IFRS. Four elements of the U.S. GAAP definition of fair value

have special meaning:

1. Orderly transaction. It is assumed that fair value is based on an orderly

transaction. This assumes exposure to the market for a period of time

prior to the measurement date to allow for the usual and customary marketing

activities for similar transactions. An orderly sale is not one that is

forced due to liquidation or other distress. Signs of forced transactions

may include:

a. Insufficient time to properly market an asset to be sold, caused by

an urgent necessity to dispose of the asset

b. Existence of a single potential buyer or a very limited group of

buyers

c. A legal requirement to sell an asset, due to contractual provisions,

laws, or regulations

Determining whether a transaction is orderly (and therefore

potentially a reliable source of information) or disorderly (and therefore

not determinative of fair value) requires judgment. As a result,

this could potentially be an area of intentional misrepresentation or

concealment of information by management in connection with a

fair value accounting fraud. FASB provided additional guidance on

determining whether a sale is orderly in April 2009 in the form of

FSP FAS 157-4, Determining Fair Value When the Volume and Level

of Activity for the Asset or Liability Have Significantly Decreased and

Identifying Transactions That Are Not Orderly.

Principal or most advantageous market. The SFAS 157 concept of fair

value assumes that the hypothetical transaction to sell an asset or transfer

a liability would occur in the principal market for such transactions,

meaning the market with the greatest volume of activity for the asset

or liability under consideration. If no such principal market exists, then

the most advantageous market should be considered. This would be the

market that maximizes the amount that would be received to sell the

asset or that minimizes the amount that would be paid to transfer

the liability in question. Further discussion of active versus inactive

markets is included in Chapter 3.

3. Transaction costs versus transportation costs. Fair value should be determined

without regard to transaction costs, the incremental direct costs

associated with selling an asset (e.g., commissions) or transferring a

liability. However, if transporting an asset to the principal or most advantageous

market would net the highest proceeds for an asset, the cost of

transporting the asset should be considered in determining the asset’s

fair value (i.e., transportation costs should be subtracted from the gross

selling price, whereas transaction costs should not).

4. Highest and best use of assets. As SFAS 157 applies to determining fair

values of an asset, the highest and best use of the asset should be used in

assessing fair value. This use may differ from the current use of the asset

by the holder of the asset. Highest and best use means one that is physically

possible, legally permissible, and financially feasible. It is based

on the highest and best use of the asset by market participants (i.e.,

those who would potentially purchase the asset). Determining what the

highest and best use of an asset is may also require judgment, meaning

that it could be another factor subject to manipulation by management

in a fair value accounting fraud scheme.