What Is the Principal Market Under ASC 820?

The principal market under ASC 820 is the market with the greatest volume and level of activity for the specific asset or liability being measured, provided the reporting entity has access to it. When such a market exists, its price sets fair value, even if a different venue would produce a better number. Identifying that market correctly is the pivot on which the rest of the fair value measurement turns.¹

What Qualifies a Market as the Principal Market

The test is trading activity for the individual instrument, not the general busyness of the venue. A security can be listed on a high-volume exchange and still fail the test if that particular security rarely changes hands there. Conversely, a dealer network that looks quiet overall may be the principal market for a specific bond that dealers move through it regularly. You are looking for where this asset or this liability sees the most transactions.¹

The venue itself can take almost any form. A major stock exchange qualifies. So does an over-the-counter dealer network, a commodities exchange, or a regional market. What matters is the transaction count in the relevant instrument compared with other markets the entity can reach.

You Can Start With Where You Normally Transact

ASC 820 does not require an exhaustive hunt across every conceivable market. Unless evidence points elsewhere, the market where the reporting entity normally does business is presumed to be the principal market for the asset or liability. The FASB built this presumption in on purpose, to keep the cost of the analysis proportionate to what it produces.¹

The practical effect matters. A bond dealer that sees the same fixed-income instrument quoted on several electronic trading systems doesn’t need to build a comparative volume study before every measurement. It can begin with the platform it actually uses. The presumption only gives way when something surfaces suggesting a different market has meaningfully greater activity in that instrument.

Access Is Required, and It’s Entity-Specific

The principal market must be one the reporting entity can access at the measurement date. This is where two companies holding the same asset can legitimately land on different principal markets. Their regulatory licenses, memberships, and operational reach differ, so the set of markets available to each differs.¹

A large institutional investor with direct exchange access might identify an exchange as its principal market. A smaller firm that trades the same security through a dealer network might identify the dealer market instead. Both conclusions can be right under ASC 820, because access is evaluated from each entity’s perspective.

Access does not require an actual trade. If a broker-dealer is registered to trade on a particular exchange, that exchange’s prices are available for fair value purposes even if the dealer is still holding the position at the reporting date. And a contractual restriction preventing the entity from selling a specific equity security on the measurement date does not change which market is the principal market for that security. The restriction constrains the entity, not the market.²

A short prerequisite sits behind all of this. Before you look for the principal market, you need the unit of account, which comes from whichever accounting standard requires the fair value measurement in the first place. The unit of account tells you whether fair value applies to a standalone asset, a single liability, or a group of items, and that framing determines what “the asset or liability” even is for the volume comparison.²

Why the Principal Market Beats a Better Price Elsewhere

ASC 820 sets a strict order. If a principal market exists, the entity must use its price. Full stop. You cannot survey other venues looking for a higher selling price on an asset or a lower transfer cost on a liability. The principal market’s price controls even when another accessible market would produce a more favorable number.¹

The most advantageous market only enters the picture when no principal market can be identified. It is defined as the market that maximizes the net amount received for an asset, or minimizes the net amount paid to transfer a liability, after deducting both transaction costs and transportation costs. The mechanics of that fallback matter less than the hierarchy: principal market first, most advantageous market only when the first analysis produces no answer.

Transaction Costs and Transportation Costs

Once you have identified the principal market and pulled its price, two cost categories need separate treatment. Confusing them is one of the more common fair value errors.

Transaction costs are the incremental expenses tied directly to selling the asset or transferring the liability: brokerage fees, exchange fees, transfer taxes. They are never included in the fair value measurement itself. They are not a characteristic of the asset. Transaction costs do factor into the most advantageous market comparison when there is no principal market, but they do not adjust the principal market price.¹

Transportation costs work differently. When location is a characteristic of the asset, the cost to move it to or from the principal market adjusts the fair value directly. Crude oil sitting at a storage facility in Oklahoma has a different fair value from the same grade of oil at a Gulf Coast terminal, because the cost of getting it to market is baked into what a buyer would pay. The price in the principal market gets adjusted for transportation costs, producing a location-specific fair value.¹

Short version: transaction costs reduce what you pocket but leave the balance sheet number alone. Transportation costs change the balance sheet number itself.

When the Principal Market Loses Its Status

A market that qualified as the principal market at one measurement date may not qualify at the next. Activity can drop off. ASC 820 lists indicators that trading volume or activity in a market has significantly declined:

Few recent transactions in the asset or liability.
Price quotations that are not based on current information.
Wide or widening bid-ask spreads.
Substantial variation among the prices different market makers quote.
A breakdown in correlation between the asset’s price and indices that used to track its fair value.
Spikes in implied liquidity premiums, yields, or performance indicators such as delinquency rates relative to the entity’s cash flow estimates.
Absence of new issuance of the asset or similar assets.
Limited publicly available information, particularly in principal-to-principal markets.

Concluding that activity has significantly declined does not let the entity ignore the transactions that did occur. ASC 820 requires further analysis of whether those transactions were orderly, and adjustments to quoted prices may be necessary before they can be used as fair value inputs. In some cases, the valuation approach itself has to change, shifting from market-based inputs to a present-value model, or combining approaches and evaluating which point in the resulting range best represents fair value in current conditions.¹

Orderly Transactions in Low-Activity Markets

ASC 820’s framework rests on the assumption that fair value reflects an orderly transaction. A forced liquidation or distressed sale does not qualify. But ASC 820 specifically warns against concluding that every transaction in a low-activity market is forced. Several circumstances suggest a transaction was not orderly: the seller did not have adequate time to market the asset, the asset was marketed to only one buyer, the seller was in or near bankruptcy, or the seller was compelled by regulatory or legal requirements. A price that looks like an outlier compared to other recent trades in the same or similar items is another red flag. When a transaction is determined to be non-orderly, its price receives little or no weight in the measurement.

How the Principal Market Conclusion Shows Up in Disclosures

ASC 820 does not require a dedicated line-item disclosure for the principal market determination. It does require disclosure of the valuation techniques and inputs used for each fair value measurement, along with the key judgments and assumptions behind the measurement. Identifying the principal market is one of those key judgments.

Auditors and regulators routinely test whether the entity’s principal market conclusion is supportable, particularly for illiquid instruments where the choice of market materially affects the reported fair value. Documentation should tie the conclusion to the specific asset or liability’s trading activity, the entity’s access, and the presumption that the entity’s normal transacting market controls unless evidence points elsewhere.¹

One boundary worth flagging: the principal market analysis governs where the price comes from. It does not by itself resolve the fair value hierarchy classification of that price, the treatment of nonperformance risk on liabilities, or whether an entry price equals fair value on day one. Those are separate ASC 820 questions with their own rules.

1
Financial Accounting Standards Board. Accounting Standards Update 2011-04 – Fair Value Measurement (Topic 820)
2
Financial Accounting Standards Board. Accounting Standards Update 2022-03 – Fair Value Measurement (Topic 820)