A4 - Fair Value Framework

Question 1

Fair Value Framework - IFRS vs. GAAP differences?

Answer 1

No significant differences.

Question 2

Fair Value Framework - Fair Value Definition

Answer 2

$ that would be rec’d to sell an asset or $ paid to xfer a liability (exit price).

Question 3

Fair Value Framework - Principal Market or Most Advantageous Market

Answer 3

Principal - greatest volume and level of activity
Most Advantageous - max selling $ or minimize xfer $ after taking into account transaction costs and transportation costs.
Note: The FV is NOT adj for transaction costs.

Question 4

Fair Value Framework - Should Fair Value be adj. for transaction cost?

Answer 4

No, because the transaction costs don’t measure a CHARACTERISTIC of the asset, liability or equity item.

Question 5

Fair Value Framework - How is it determined?

Answer 5

Highest or best use in orderly transaction from perspective of mkt participant who will hold the asset, liability or equity item (no the reporting entity)

Question 6

Fair Value Framework - What is the applicability?

Answer 6

The content of ASC 820 must be followed for items that use fair value measurement either as required or as permitted by GAAP, except in very limited situations.

Question 7

Fair Value Framework - Does the FV Framework guidance apply to Inventory when determining LCM?

Answer 7

Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, “Fair Value Measurement.” The use of lower of cost or market valuation places upper (“ceiling”) and lower (“floor”) limits on the measurement of “market” that may not result in a true fair value measurement.

Question 8

Fair Value Framework - Entry vs. Exit Price

Answer 8

Entry: $ pd to acquire and asset or $ rec’d to assume a liability
Exit: $ rec’d to sell and asset or $ pd to xfer a liability

Question 9

Fair Value - FV Option

Answer 9

Election to measure @ FV Recognized financial assets and liabilities (with few exceptions). Ex: Equity Method Investment (20-50%)

Question 10

Fair value - When can FV option be elected?

Answer 10

FV Option can be elected only when the item is first recognized, when an eligible firm commitment occurs, when the acctg treatment of an investment in another entity changes. Generally, election is irrevocable (unless new election date occurs).

Question 11

FV - Investment Securities Held for Trading and their Gains/Losses

Answer 11

When Investment Securities held for trading are MTM (FV Option), the gains and losses will be reported in current income NOT to OCI. MTM occurs at each subsequent reporting date.

Question 12

FV - Observable vs. Unobservable Inputs

Answer 12

Observable - sources independent of reporting entity

Unobservable - entity assumptions based on best info

Question 13

FV - Inputs Hierarchy

Answer 13

Level 1: Unadj quoted prices, active mkt, identical item
Level 2: Observable inputs that don’t meet all conditions for Level 1. Quoted $ in active mkts, similar items. Quoted $, inactive mkts. Observable inputs other than quoted mkt $ that are relevant to item being valued.
Level 3: Unobservable inputs for items being valued.

Question 14

FV - Disclosure Requirements

Answer 14

Must disclose recurring vs. non-recurring basis, FV at reporting date and valuation techniques and inputs used for those techniques.