Fair Value
Related terms
Category
General Concepts
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. In lease accounting, the fair value of the underlying asset is used in classification tests and impairment assessments.
Why it matters
Fair value is used in the ASC 842 classification test. if the present value of lease payments equals or exceeds substantially all (typically 90%) of the asset's fair value, the lease is classified as finance. Fair value also matters for impairment testing of ROU assets and for sale-leaseback transaction accounting.
How Arvexi handles this
Arvexi incorporates fair value data in the classification test and flags leases where the PV-to-fair-value ratio is near the 90% threshold. The platform documents the fair value basis used for audit purposes.