---
title: Navigating Fair Value Measurements Under GAAP
description: GAAP
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---
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# Navigating Fair Value Measurements Under GAAP
By Jamie Gardner | Apr 29, 2025
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Many balance sheet items are reported at historical cost. However, current accounting standards require organizations that follow U.S. Generally Accepted Accounting Principles (GAAP) to report certain assets and liabilities at “fair value.” This shift aims to enhance transparency and reflect an entity’s current financial position more accurately. However, estimating fair value can involve significant judgment and subjectivity, especially when observable market data is unavailable.
**Defining fair value**
Under GAAP, 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.” Examples of assets that may be reported at fair value are asset retirement obligations, derivatives and intangible assets acquired in a business combination.
Accounting Standards Codification Topic 820, *Fair Value Measurement,* explains how companies should estimate fair value using available, quantifiable market-based data. It provides the following three-tier valuation hierarchy for valuation inputs:
1. Quoted prices in active markets for *identical* assets or liabilities,
2. Inputs other than quoted prices that are observable, such as prices for similar assets in active markets or identical assets in inactive markets, and
3. Nonpublic information and management’s estimates.
Fair value measurements, especially those based on the third level of inputs, may involve significant judgment, making them susceptible to misstatement. Therefore, these estimates usually require more auditor focus.
Additionally, fair value measurements require detailed footnote disclosures about the valuation techniques, inputs and assumptions used. These disclosures help financial statement users understand how fair value was determined and evaluate its impact on earnings, financial position and risk exposure.
**Auditing estimates**
To substantively test fair value measurements, external auditors evaluate the reasonableness and consistency of management’s assumptions. They also assess whether the underlying data is complete, accurate and relevant. Using management’s assumptions (or alternate assumptions), auditors may develop an independent estimate to compare to what’s reported on the internally prepared financial statements.
Another way auditors test the reasonableness of fair value estimates is by reviewing subsequent events that occur after the balance sheet date but before the audit report is issued. For example, ABC Co., a calendar-year entity, acquired a competitor in October 2024 and allocated $500,000 of the purchase price to a trademark. With no active market for trademarks, management used the relief-from-royalty method to estimate its fair value. On February 1, 2025, ABC licensed the trademark to a third party. The company’s external auditor compared the licensing terms to management’s assumptions and found the royalty rates aligned. As a result, no further audit procedures were needed to support the fair value estimate.
In today’s uncertain marketplace, accounting estimates may face increased scrutiny from auditors. Measuring fair value is outside the comfort zone of most in-house accounting personnel. Outside appraisal experts can provide objective, market-based evidence to support the fair value of assets and liabilities.
**We’re here to help**
Fair value is one of the gray areas in financial reporting. Approach fair value estimates with diligence, documentation and, where necessary, third-party support. Contact us for guidance on complying with the complex fair value measurement and disclosure rules.
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