7 - Fair Value Framework - Intro and Definitions Flashcards
is used to measure and report financial statement items as required or permitted by a number of GAAP pronouncements (ASCs)
Fair value
provides a framework for how to measure fair value to achieve increased consistency and comparability in fair value measurements and expanded disclosure when fair value measurements are used.
ASC 820
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.
Fair Value (a market-based measurement, not an entity-specific measurement.) (focuses on how to measure fair value not when to measure fair value.)
Which price is FV based on?
Exit Price (Cash rec’d for asset or paid for liab) (2 different markets for exit and sell price, ex: selling a car day after you buy it)
The determination of fair value for a particular asset or liability may be either a ___ asset or liability or a ____.
stand-alone, a group of assets/liabilities
hypothetical transaction at the measurement date that would occur under current market conditions; it is NOT a transaction that would occur in a ____
forced liquidation or distress sale.
Even when there is no ___to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement assumes that a transaction takes place at that date.
observable market
The ___ establishes a basis for estimating the price to sell the asset or transfer the liability.
assumed transaction
The hypothetical transaction to sell the asset or transfer the liability is assumed to occur in the ___.
principal market
In the absence of a principal market, the _____ for the asset or liability, to which the entity has access, after taking into account transaction costs and transportation costs.
most advantageous market
the one with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.
principal market
the one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability.
most advantageous market
The price determined in the principal or most advantageous market should not be adjusted for
transaction costs (do not measure a characteristic of the asset) (Cost to TRANSPORT item would be use to adjust FV for measurement purposes)
Market participants, as used in the definition, are buyers and sellers of the asset or liability that are
Independent, Acting in their best interest, knowledgeable of asset, & able and willing but not COMPELLED
assumes the highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different;
determination of fair value of a nonfinancial asset
must take into account what is physically possible, legally permissible and financially feasible at the measurement date.
The highest and best use
The highest and best use of an asset may be 2 choices:
In use, In Exchange
Maximum value to market participants would occur through its use in combination with other assets as a group;
In Use
Maximum value to market participants would occur principally on a stand-alone basis (i.e., the price that would be received in a current transaction to sell the [single] asset)
In Exchange
The determination of fair value of a liability assumes that the liability is transferred to a market participant at the measurement date, not what?
settled or canceled
The liability to the counterparty (i.e., the party to whom the obligation is due) is assumed to what?
continue after the hypothetical transaction.
relating to the liability is assumed to be the same after the hypothetical transaction as before the transaction.
Nonperformance risk
The determination of fair value of a liability should consider the effects of the reporting entity’s___ on the fair value of the liability in each period for which the liability is measured at fair value
credit risk
to other inputs to account for a restriction that prevents the transfer of liabilities should not be made in measuring fair value.
A separate input or an adjustment
When a ____ for the transfer of an identical or similar liability is not available, and the identical liability is held by another party as an asset, the liability should be measured ___
Quoted Price, from the perspective of the party that holds the item as an asset.
The requirements for the determination of fair value apply to ____ that are measured at fair value (e.g., equity interest issued as consideration in a business combination).
instruments classified in shareholders’ equity
The measurement assumes the instrument is ____ and is measured from the perspective of a market participant that holds the instrument as an asset.
transferred to a market participant at the measurement date
A _____ to other inputs to account for a restriction that prevents the transfer of a shareholder equity instrument should not be made in measuring the fair value.
separate input or an adjustment t
When a _____ for the transfer of an identical or similar shareholders’ equity instrument is not available and the identical instrument is held by another party as an asset, the instrument should be measured from the perspective of the party that holds the item as an asset.
quoted price
An exception to the requirement that fair value of qualified financial assets and financial liabilities be measured separately is permitted when a reporting entity ____, rather than on a gross exposure basis.
manages risk associated with a portfolio of financial instruments on a net exposure basis
ASC 820 does not apply to:
Accounting principles that address share-based payment transactions
ASCs that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including:
Accounting principles that permit measurements that are determined using vendor-specific objective evidence of fair value; or
Accounting principles that address fair value measurement for purposes of inventory pricing
Accounting principles that address fair value measurements for purposes of lease classification or measurement
ASCs that permit practicability exceptions to fair value measurement (see below)
Pervasive Applicability—Other than the exceptions noted above, the content of ASC 820 must be followed when fair value measurement is used, either as required or permitted by other pronouncements.
the content of ASC 820 must be followed when fair value measurement is used, either as required or permitted by other pronouncements.
Pervasive Applicability
measure the fair value of an investment that does not have a quoted market price but reports a net asset value per share (NAV)
practical expedient (alternative investments) (hedge funds, private equity funds, real estate funds, venture capital funds, common/collective funds, and offshore funds.)
criteria in order to use NAV as the practical expedient
Does not have a “readily determinable fair value.”
The investment meets the criteria for an investment company as stipulated in ASC 940-10-15-2 or does not meet the criteria to be an investment company but follows industry practice and issues financial statements consistent with the measurement principles for an investment company.
T/F: The requirements of ASC 820, “Fair Value Measurement,” do not apply to inventory pricing.
True
T/F: The use of fair value measurement is required by a number of GAAP pronouncements.
True
T/F: The fair value of a nonfinancial asset is based on its highest and best use by the reporting entity.
False (by market participants)
T/F: Fair value determination must take into account the characteristics of the specific asset or liability being valued.
True
T/F: The price determined in the principal or most advantageous market should be adjusted for transportation cost in arriving at fair value in applying the fair value option.
True
T/F: The fair value of a liability is based on the amount that would be paid to transfer the liability.
True
T/F: Fair value is based on an exit price.
True
T/F: In determining the highest and best use of an asset, it must be assumed that the asset will be used in combination with other assets as a group.
False
T/F: The fair value of a liability is based on the amount that would be paid to settle the liability.
False
T/F: The price determined in the principal or most advantageous market should be adjusted for transaction cost in arriving at fair value in applying the fair value option.
False (used transaction cost when we decided to use most advantage market, don’t use it again for FV)
T/F: Fair value is based on a hypothetical transaction occurring in the principal or most advantageous market for the asset or liability being valued.
True
T/F: The fair value of an asset is based on the price that would be paid to acquire the asset.
False (sell the asset) (EXIT PRICE)
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.
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
For purposes of the fair value definition, what are the assumed characteristics of market participants?
Independent, acting in their best interest, knowledgeable, & able and willing
In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following?
What is physically possible
What is financially feasible
How the reporting entity would use the asset
What is legally permissible
How the reporting entity would use the asset
ASC 820 specifically exempts____ & ____ from the purview of the fair value framework.
share-based payment transactions, inventory valuing (Determination of the fair value of legal services received in exchange for an entity’s common stock)
