20 Fair Value Measurements Flashcards
What are the three levels of the fair value hierarchy and what does each consist of?
Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued
Level 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in Level 1
Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available
What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e., Level 3 inputs)?
Narrative description of the uncertainty of fair value to changes in unobservable inputs
Unrealized gains/losses for the period and where reported
For purposes of the fair value definition, what are the assumed characteristics of market participants?
Buyers and sellers that are:
Independent of the reporting entity
Acting in their economic best interest
Knowledgeable of the asset or liability and the transaction involved
Able and willing, but not compelled, to transact for the asset or liability
Define “fair value” (for accounting purposes).
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
Is the fair value option for financial liabilities required, and to what securities is it applied?
It is an option (not required) and can be applied to any and all financial liabilities.
What types of comparisons are fair value option disclosures intended to facilitate?
Between entities that choose different measurement methods for similar assets and liabilities
Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities
List the dates when an entity may elect to use fair value option for an eligible item.
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
What is the income statement effect of the fair value option applied to financial liabilities?
Recognize gain or loss for the change in the fair value adjustment of the liability during the period.
Describe the market approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).
This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.
What is the major purpose of the fair value framework?
To provide a framework for the use of fair value in generally accepted accounting principles (GAAP) so as to:
Achieve increased consistency and comparability in fair value measurements; and
Expand disclosure when fair value measurements are used.
What are the three valuation techniques (or approaches) that should be used in determining fair value for the purposes of generally accepted accounting principles?
- Market approach
- Income approach
- Cost approach
What purpose does the fair value hierarchy serve?
To prioritize the inputs to valuation techniques used to measure fair value
Describe fair value measurement inputs.
Inputs can be observable or unobservable. Observable inputs are based on market data from independent sources. Unobservable inputs are the entity’s assumptions about the factors that impact determination of fair value.
Describe the income approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).
This approach converts future amounts to a single present amount.
