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Markets for Assets and Liabilities Subject to Fair Value Accounting

ASC 820 outlines four potential markets for assets and liabilities subject to fair value accounting: active exchange, dealer, brokered, and principal-to-principal. Here’s a quick explanation of each:

  • Active exchange: These markets are stock exchanges in which fair value closing prices for the financial asset or liability are readily available. As of the publication of this book, the major five stocks exchanges, in order, are as follows:

    • NYSE Euronext: Located in New York City, it covers the U.S. and Europe economies.

    • NASDAQ OMX: Located in New York City, it also covers the U.S. and European economies.

    • Tokyo Stock Exchange: Located in Tokyo, it cover the Japanese economy.

    • London Stock Exchange: Located in London, it covers the U.K. economy.

    • Paris Stock Exchange: Located in Paris, it covers the French economy.

  • Dealer market: In these markets, participants buy and sell for their own account, using their own money via the telephone or computer. In the U.S., they are known as over-the-counter (OTC) markets. Examples include forward contracts, which are agreements between two parties to buy or sell an asset in the future at the price agreed upon today.

  • Brokered market: These markets match buyers with sellers. The broker, the individual doing the matchmaking, isn’t trading his own securities, nor is he operating from any inventory of securities. For example, imagine that you want to buy 100 shares of stock in AT&T. You call your stockbroker, who facilitates the transaction for you but doesn’t ever own the shares of AT&T during any part of the transaction.

  • Principal-to-principal: The actual parties to the transaction negotiate directly with each other, without using a middleman. For example, Company A has a widget machine, and Company B is willing to pay a certain amount to purchase it.

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