How do I identify the principal market for fair value measurement?

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AcadiFi · Accepted Answer

The principal market is the market with the greatest volume and level of activity for the asset or liability, considered from the reporting entity's perspective. Fair value must be measured using the price in that market, even if prices in another market are more favorable on the measurement date.

For Quillson Metals, start by determining whether the entity has access to both LME and COMEX. If access is legally and practically available to both, compare volume and activity: LME reports 150 million tonnes of copper contracts annually versus COMEX 75 million. LME is the principal market. Use LME's closing spot price as fair value, even if COMEX quoted $0.05/lb higher that day.

If you cannot identify a principal market (activity is roughly equal or data unavailable), default to the most advantageous market, which is the market that maximizes the amount that would be received to sell the asset (net of transaction costs, though transaction costs are excluded from the final fair value measurement). The entity's typical trading venue is often a strong indicator.

Key points: principal market is determined at the reporting entity level, not for each class of market participant; it is the market the entity has access to; and transaction costs are used to identify the most advantageous market but are not included in fair value itself. Reassess principal market each reporting date because activity levels shift.

How do I identify the principal market for fair value measurement?

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