20.01 Fair Value Measurements Flashcards
What is the definition of fair value?
ASC 820 defines fair value as “the price that would be received to sell an asst or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
What items are required to be reported at fair value?
Investments in marketable debt securities classified as either trading securities or available-for-sale securities; Investments in equity securities, except those accounted for under the equity method; Investments required to be consolidated; Investments for which the market value is not readily determinable (assuming the appropriate election has been made); With very few exceptions, assets acquired and liabilities assumed in a business combination; Impairment losses; All derivatives, except for interest rate swaps that are hedges when the alternative accounting approach available to nonpublic entities is elected.
What are transaction costs?
Incremental direct costs to sell the asset or transfer the liability. These are not considered in determining the asset or liability’s fair value.
What are transportation costs?
Costs incurred to transport the asset or liability to its principal or most advantageous market. These costs are considered in determining the asset or liability’s fair value.
What are the three approaches used in determining fair value?
Market, income, and cost
What is the market approach used to determine fair value?
Information generated by market transactions for identical or similar items.
Quoted price from stock exchange; The use of multiples from recent transactions.
What is the income approach used to determine fair value?
Estimated future amounts discounted to a single, current amount.
Discounted cash flow analysis; Capitalization of earnings
What is the cost approach used to determine fair value?
Amount currently required to replace the benefit derived from an asset.
Replacement cost; Reproduction cost.
What is a Level 1 input?
The most reliable, involves the use of observable data from actual market transactions, occurring in an active market, for identical assets or liabilities.
What is a Level 2 input?
Also involves the use of observable data from actual market transactions but with either of the following conditions: the transactions did not occur in an active market or the transactions relate to similar, but not identical, assets or liabilities.
What is a Level 3 input?
The least reliable, involves the use of unobservable data and is largely based on management’s judgment.
