10-9-16 FAR VALUE Flashcards
In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for
Transaction Cost Transportation Cost
Yes Yes
Yes No
No Yes
No No
Transaction Cost Transportation Cost
No Yes
In determining the fair value of an asset in the most advantageous market, the market based exit price would :
would be adjusted for transportation cost to get the asset to the principal or most advantageous market.
Transaction cost associated with executing the (hypothetical) transaction WOULD NOT
The fair value for an asset or liability is measured as
A. The appraised value of the asset or liability.
B. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale
C
By definition, the fair value for an asset or liability is measured as the price that would be RECEIVED when selling an asset or PAID when transferring a liability in an orderly transaction between market participants; that is, fair value is measured as an exit price.
**The question tried to trick you with answer by switching the definition around **
In the determination of fair value of a nonfinancial asset, the highest and best use of the asset may be determined as occurring through use and/or through exchange.
Through Use Through Exchange
Yes Yes
Yes No
No Yes
No No
Through Use Through Exchange
Yes Yes
The highest and best use of a nonfinancial asset (i.e., its maximum value) to market participants may occur either principally through its use with other assets
or
principally on the price that would be received to sell (exchange) the asset.
On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
A. $ 6,000
B. $10,000
C. $16,000
D. $18,000
C. $16,000
Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize
2 things:
*1-
its share of cash dividends received during the period (.30 x $20,000 = $6,000)
*2-
the increase in the fair value of the investment ($400,000 > $410,000 = $10,000),
$6,000 + $10,000 = $16,000.
For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?
A. Determination of the fair value to be assigned to land acquired in a business combination.
B. Determination of the fair value of a bond liability for applying the fair value option.
C. Determination of the fair value of legal services received in exchange for an entity’s common stock.
D. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred.
C. Determination of the fair value of legal services received in exchange for an entity’s common stock.
The guidance for determining fair value provided in the fair value framework is NOT appropriate for determining the fair value of legal services received in exchange for an entity’s common stock.
**ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
True /False- “Fair Value Measurement,” applies to the following circumstances as guidance in determining fair value as provided in the fair value framework presented in ASC 820,
- Determination of the fair value to be assigned to land acquired in a business combination.
- Determination of the fair value of a bond liability for applying the fair value option.
- Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred.
True
True/False-
ASC 820 “Fair Value Measurement,” specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework
ie Determination of the fair value of legal services received in exchange for an entity’s common stock is NOT done under ASC820
True
Which of the following statements concerning the determination of fair value is/are correct?
I. The determination of fair value is based on a hypothetical transaction.
II. The determination of fair value is based on an exit price.
III. The determination of fair value of a nonfinancial asset should be based on the intended use of the asset by the reporting entity.
A. I only.
B. II only.
C. I and II only.
D. II and III only.
C. I and II only.
The determination of fair value is based on:
1- a hypothetical transaction
2-on the use of a (hypothetical) exit price.
3.nonfinancial asset should be based on the highest and best use of the asset by market participants
Statement III is not correct. The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants, NOT based on the intended use by the reporting entity.
A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows
Quoted price of asset Transaction costs Market A $1,000 $75 Market B 1,050 150 What is the fair value of the financial asset?
A. $ 900
B. $ 925
C. $1,000
D. $1,050
C. Market A $1,000
The fair value of the financial asset is $1,000, the quoted price in the most advantageous market, but without adjusting that price for transaction costs.
Since there is no principal market for the financial asset, the most advantageous market must be used to determine fair value.
The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs. :
Market A Market B Quoted price of asset $1,000 $1,050 Transaction cost ( 75) ( 150) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Net Proceeds $925 $900
The use of fair value measurement is required for some items in financial statements and optional for other items. Is the framework for determining fair value measurement, as set forth in ASC 820, “Fair Value Measurement,” generally required to be followed in circumstances where fair value measurement is required and/or in circumstances where fair value measurement is elected by a firm?
Fair Value Required Fair Value Elected
Yes Yes
Yes No
No Yes
No No
Fair Value Required Fair Value Elected
Yes Yes
The framework for determining (measuring) fair value provided in ASC 820, “Fair Value Measurement,” must be followed (with very limited exceptions) whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.
For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, “Fair Value Measurement,” not apply?
A. Accounts receivable.
B. Investments in debt securities to be held-to-maturity.
C. Investments in equity securities held for trading.
D. Inventory reported at lower of cost or market.
D. Inventory reported at lower of cost or market.
Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, “Fair Value Measurement.”
Also NOT included are lease contracts and pension plans
Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?
A. Provide a uniform definition of “fair value” for GAAP purposes.
B. Provide a framework for determining fair value for GAAP purposes.
C. Establish new measurement requirements for financial instruments.
D. Establish expanded disclosures about fair value when it is used.
C. Establish new measurement requirements for financial instruments.
True /False
Objectives – ASC 820, “Fair Value Measurement”
it provides the following:
1. A definition of fair value for GAAP purposes;
2. A framework for measuring (determining) fair value for accounting purposes;
3. A set of required disclosures about fair value measurement when it is used.
True
Which one of the following can be measured at fair value at the option of the reporting entity?
A. A liability under a lease contract.
B. An investment classified as held-for-trading.
C. An investment classified as held-to-maturity.
D. A liability under a pension plan.
C. An investment classified as held-to-maturity.
Traditionally, investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity.
NOTE:
Lease contract and Pension plans are NOT permitted they have their own rules
Held -for - trading MUST be measured at fair value per GAAP
Which one of the following financial items may not be measured and reported at fair value at the election of an entity?
A. Accounts receivable.
B. Investment in debt securities to be held to maturity.
C. Investment in a subsidiary that is to be consolidated.
D. Accounts payable.
C. Investment in a subsidiary that is to be consolidated.
A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset “Investment in subsidiary” will be eliminated in the consolidating process and be replaced by the subsidiary’s assets and liabilities (and possibly goodwill) on the consolidated balance sheet.
