Asset redeployability and fair value accounting

Abstract

Accounting Standards Codification 820 (ASC 820), which addresses fair value measurement, mandates that companies categorize their fair value inputs, both assets and liabilities, into three distinct levels. Level 1 represents inputs derived from highly observable market prices, whereas Level 3 is based on data that is minimally observable. Examining a sample from 2008 to 2020, consisting of more than 30,000 firm-year observations, we identify a significant positive relation between asset redeployability and the use of Level 1 inputs, suggesting that firms with assets that can be easily repurposed tend to prefer these transparent valuation methods. On the other hand, we observe a significant negative relation between asset redeployability and the use of Level 3 inputs, implying that firms with flexible assets are less likely to depend on subjective or obscure valuation techniques. These results emphasize that businesses with more redeployable assets favor market-driven and objective inputs.