009 Recognition and Measurement

Question 1

List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.

Answer 1

1. An investment in a subsidiary or variable interest to be consolidated 2. Employers’ and plans’ obligations for pension benefits, other postretirement benefits, post-employment benefits 3. Financial assets and liabilities under lease accounting 4. Demand deposit liabilities of financial institutions 5. Financial instruments classified by the issuer as a component of shareholders’ equity.

Question 2

Describe the cost approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 2

This approach uses the amount currently required to replace the service capacity of an asset.

Question 3

List the dates when an entity may elect to use fair value option for an eligible item.

Answer 3

1 When item is first recognized;
2 When firm commitment occurs;
3 When financial, an asset previously reported at fair value with unrealized gain/loss in earnings, no longer qualifies for that fair value treatment;
4 When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation;
5 When an item is measured at fair value at the time of an event, but does not require fair value measurement at subsequent reporting dates.

Question 4

What are the three valuation techniques (or approaches) that should be used in determining fair value for Generally Accepted Accounting Principles purposes?

Answer 4

1. Market approach 2. Income approach 3. Cost approach.

Question 5

List the items that entities may elect to measure and report at fair value.

Answer 5

1 Recognized financial assets or financial liabilities, (some exceptions);
2 Firm commitments;
3 Written loan commitments;
4 Rights and obligations under insurance contracts and warranties;
5 Other financial instruments embedded in non-financial derivative instruments.

Question 6

Describe the market approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 6

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.

Question 7

Define “entry price”.

Answer 7

The price paid to acquire an asset or the price received to assume a liability.

Question 8

List the situations where the entry price may not be the exit price.

Answer 8

1 The transaction is between related parties;
2 The transaction occurs when the seller is under duress;
3 The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value;
4 The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred.

Question 9

Define “exit price”.

Answer 9

The price that would be received to sell an asset or paid to transfer a liability.

Question 10

Describe the income approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 10

This approach converts future amounts to a single present amount.