2. Summary of Significant Accounting Policies: Fair Value of Financial Instruments (Policies)

9 Months Ended

Sep. 30, 2013

Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2013 and December 31, 2012, the balances reported for cash, accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses, and loans payable approximate the fair value because of their short maturities.

We have adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2013 and December 31, 2012:

	Total	Level 1	Level 2	Level 3
September 30, 2013:
Derivative liability	$ 410,812	$ -	$ -	$ 410,812
Convertible notes payable, net of discount	189,365	-	-	189,365

Total liabilities measured at fair value	$ 600,177	$ -	$ -	$ 600,177

December 31, 2012:
Derivative liability	$ 58,562	$ -	$ -	$ 58,562
Convertible notes payable, net of discount	145,296	-	-	145,296

Total liabilities measured at fair value	$ 203,858	$ -	$ -	$ 203,858

VITAMIN BLUE, INC. 10-Q