11. Recognition & Measurement

Question 1

List the items that entities may elect to measure

and report at fair value.

Answer 1

Recognized financial assets or financial liabilities (some
exceptions)
Firm commitments
Written loan commitments
Rights and obligations under insurance contracts and
warranties
Other financial instruments embedded in nonfinancial
derivative instruments

Question 2

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

Answer 2

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

Question 3

Define “entry price.”

Answer 3

The price paid to acquire an asset or the price received to

assume a liability

Question 4

Define “exit price.”

Answer 4

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

transfer a liability

Question 5

List the situations where the entry price may not

be the exit price.

Answer 5

The transaction is between related parties.
The transaction occurs when the seller is under duress.
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.
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 6

What are the three valuation techniques (or
approaches) that should be used in determining
fair value for the purposes of generally accepted
accounting principles?

Answer 6

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

Question 7

Describe the market approach for determining
fair value for the purposes of generally accepted
accounting principles (GAAP).

Answer 7

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

Question 8

Describe the income approach for determining
fair value for the purposes of generally accepted
accounting principles (GAAP).

Answer 8

This approach converts future amounts to a single present

amount.

Question 9

Describe the cost approach for determining fair
value for the purposes of generally accepted
accounting principles (GAAP).

Answer 9

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

Question 10

List the dates when an entity may elect to use

fair value option for an eligible item.

Answer 10

When the item is first recognized
When firm commitment occurs
When financial, an asset previously reported at fair value
with unrealized gain/loss in earnings no longer qualifies for
that fair value treatment
When accounting treatment for an investment changes
because it becomes subject to the equity method or ceases
to be eligible for consolidation
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