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Company Accounting > 11. Fair Value Measurement > Flashcards

11. Fair Value Measurement Flashcards

1
Q

Is measurement at fair value permitted?

A

Measurement at fair value is permitted or required in a number of current AASB accounting standards.

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2
Q

What is the three main objectives of AASB 13?

A

AASB 13 has three main objectives: (1) to define fair value, (2) to establish a framework for measuring fair value, and (3) to require disclosures about fair value measurement.

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3
Q

What did the IASB issue in 2011?

A

In 2011, the IASB issued an accounting standard on fair value measurement that was then issued by the AASB as AASB 13 Fair Value Measurement.

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4
Q

What is AASB 13?

A

AASB 13 introduces a new definition of fair value which is different from that used previously in accounting standards.

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5
Q

Are transport and transaction costs considered part of fair value?

A

While transaction and transport costs are both considered in the measurement of fair value, fair
value is not adjusted for transaction costs.

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6
Q

What transaction is used to measure fair value?

A

The transaction used to measure fair value is that between market participants, and fair value
is not an entity-specific price.

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7
Q

What is fair value defined as?

A

Fair value is defined as an exit price rather than an entry price.

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8
Q

To determine fair value, the particular asset being measured must be determined what is the process?

A

This process includes considering such factors for assets as the condition and location of the assets.

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9
Q

Does the AASB 13 contain a fair value hierarchy?

A

Yes, classifying inputs into three levels.

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10
Q

What are the three valuation techniques useful for measuring fair value?

A

(1) the market approach, (2) the income approach and (3) the cost approach.

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11
Q

Does the reporting entity have to determine the principal market for the asset being valued?

A

Yes, or, if this is not available, the most advantageous market.

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12
Q

What does the measurement of fair value rely on?

A

The reporting entity determining the appropriate valuation premise, effectively choosing between the in combination valuation premise and the stand-alone valuation premise.

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13
Q

T or F

In the measurement of the fair value of a liability, the highest and best use does not apply.

A

True

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14
Q

Do the effects of non-performance risk have to be taken into consideration in fair valuing a liability.

A

Yes

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15
Q

T or F

An entity may refer to the value of a corresponding asset in measuring the fair value of its liability.

A

True

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16
Q

Could present value techniques be very useful in the measurement of liabilities.

A

Yes

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17
Q

Do the effects of non-performance risk have to be taken into consideration in fair valuing a liability?

A

Yes

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18
Q

True or False?
Determining the fair value of an equity instrument must be based on determining an exit price
which may relate to the price paid for an entity to repurchase its shares

A

True

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19
Q

What does measuring the fair value of financial assets and liabilities require?

A

The application of the general principles applicable to measuring the fair value of non-financial assets and liabilities.

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20
Q

T or F?
Where a market has both a bid and an ask process, the most representative price is used in
measuring fair value.

A

True

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21
Q

Are disclosures required for assets and liabilities measured at fair value?

A

Yes

22
Q

Where the current use of an asset differs from its highest and best use, are disclosures required to be made?

A

Yes

23
Q

T or F?
Disclosures are required where a class of assets and liabilities is not measured at fair value but
where the fair value is disclosed by way of note disclosure.

A

True

24
Q

Should users be able to assess the methods and inputs used to develop the measures of fair
value?

A

Yes

25
Q

Has there been questions raised as to the reliability of fair value measures?

A

Yes, and the ability of auditors to be able to test these measures.

26
Q

T or F?
It is debatable whether the standard setters should complete the measurement chapter of the Conceptual Framework prior to issuing standards on fair value measurement.

A

True

27
Q

Is the use of the term ‘fair value’ not be applicable to prices determined using Level 3 inputs?

A

Yes

28
Q

True or False?
There exist examples of entities that have produced fair value numbers to improve their financial position and performance but have subsequently gone into liquidation with huge losses being exposed.

A

True

29
Q

What is an active market?

A

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis

30
Q

What is cost approach?

A

A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost)

31
Q

What is entry price?

A

The price paid to acquire an asset or received to assume a liability in an exchange transaction

32
Q

What is exit price?

A

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

33
Q

What is fair value?

A

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

34
Q

What is highest and best use?

A

The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used

35
Q

What is the income approach?

A

Valuation techniques that convert future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount; the fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts

36
Q

What is inputs?

A

The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following: (a) the risk inherent “in a particular valuation technique used to measure fair value (such as a pricing model); and (b) the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable

37
Q

What is level 1 inputs?

A

Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date

38
Q

What is level 2 inputs?

A

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

39
Q

What is level 3 inputs?

A

Unobservable inputs for the asset or liability

40
Q

What is the market approach?

A

A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business

41
Q

What is market participants?

A

Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: (a) they are independent of each other, i.e. they are not related parties as defined in AASB 124, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms; (b) they are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary; (c) they are able to enter into a transaction for the asset or liability; (d) they are willing to enter into a transaction for the asset or liability, i.e. they are motivated but not forced or otherwise compelled to do so

42
Q

What is the most advantageous market?

A

The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs

43
Q

What is non-performer risk?

A

The risk that an entity will not fulfil an obligation. Non-performance risk includes, but may not be limited to, the entity’s own credit risk

44
Q

What is observable inputs?

A

Inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability

45
Q

What is an orderly transaction?

A

A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale)

46
Q

What is the principal market?

A

The market with the greatest volume and level of activity for the asset or liability

47
Q

What is transaction costs?

A

The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria: (a) They result directly from and are essential to that transaction. (b) They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell, as defined in AASB 5)

48
Q

What is transport costs?

A

The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market

49
Q

What is the unit of account?

A

The level at which an asset or a liability is aggregated or disaggregated in a AASB for recognition purposes

50
Q

What is unobservable inputs?

A

Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability

Company Accounting (11 decks)

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