{"id":5219,"date":"2022-05-21T14:05:12","date_gmt":"2022-05-21T08:35:12","guid":{"rendered":"https:\/\/www.trica.co\/equity\/blog\/?p=5219"},"modified":"2022-07-01T04:27:05","modified_gmt":"2022-07-01T04:27:05","slug":"asc-820-need-one","status":"publish","type":"post","link":"https:\/\/trica.co\/equity\/blog\/us\/asc-820-need-one\/","title":{"rendered":"What Is ASC 820, and Why Do You Need One?"},"content":{"rendered":"

Profitable investments are the financial core of every business, and such investments depend largely on business value. This value is also critical in negotiations and for building accurate financial reports. The ASC 820 fair value comes into the picture here and is helpful when keeping LPs (limited partners) abreast of any investment updates. We will take you through the ASC 820 in detail below.
\nRelated: <\/b>7 Things Investors Look for in a Cap Table<\/b><\/a>
\nDefinition: ASC 820\u00a0<\/b>
\nListing company assets and liabilities is relatively complex, given that the value of said assets and liabilities constantly fluctuates with changing market trends.
\nConsequently, determining the valuation of company holdings is cumbersome. However, this was simplified when the Financial Accounting Standards Board (FASB) issued the ASC 820 in 2018.
\nThe ASC 820, also known as the Fair Value Measurements and Shareholding Disclosure, is an accounting standard that defines fair value and the framework within which it should be determined.<\/b>
\nIt guides in line with Generally Accepted Accounting Principles (GAAP) and is beneficial in assessing asset value for each financial reporting period.<\/p>\n

ASC 820: Understanding Impact and Importance<\/b><\/h2>\n

Earlier FASB standards involved complicated processes that overstated asset and liability values. In addition, reporting requirements were tedious, and the reports themselves were not very useful.
\nThe ASC 820 brings clarity in reporting to the cap table, as well as a shift in focus. Namely, greater weight is given to the value an asset would fetch in the market<\/b> instead of its purchased value.
\nThis is particularly useful since assets and liabilities are evaluated based on their current market values, increasing disclosure requirements. In addition, ASC 820 is efficient, even in complex cases involving highly illiquid assets.<\/p>\n

Breaking Down the Liquidity Hierarchy<\/b><\/h3>\n

The ASC 820 is advantageous in its classification of assets based on liquidity.<\/b> This is helpful since the more liquid an asset is, the easier it is to determine its value. Additionally, this standard also applies to liabilities,<\/b> determining the price paid to transfer this liability at fair value.
\nWe detail the levels of the hierarchy below:<\/p>\n

Level 1 assets & liabilities<\/b><\/h3>\n

Level 1 assets are liquid and liable, whose values are easily determined. Common examples include publicly-traded stocks and money-market funds.<\/p>\n

Level 2 assets & liabilities<\/b><\/h3>\n

These assets and liabilities are not as readily priced as Level 1 but are not as esoteric as Level 3. Level 2 asset and liability prices can be determined by extrapolating available data, such as market prices of other equivalent assets and even interest rate swaps.<\/p>\n

Level 3 assets & liabilities<\/b><\/h3>\n

Level 3 assets and liabilities are highly illiquid, and market data is elusive. This is what makes determining their price such a difficult task. Common examples include foreign stocks, equity shares, and preferred stock in a company.<\/p>\n

Carrying out the Valuation<\/b><\/h2>\n

The ASC 820 requires that companies use available market data for all valuation methods, and in their absence, they encourage the usage of models based on market data.
\nBelow, we detail exactly how to value a company\u2019s holdings:<\/p>\n

Step 1: Calculating the overall value<\/b><\/h3>\n

Calculating the enterprise value entails estimating its total worth, including cash and other assets, equity, and liabilities.<\/b> There are various ways a company can go about this, as presented below:<\/p>\n

Methods of evaluation<\/b><\/h4>\n