Chapter 2 Flashcards
What is FASB ASC 820?
It defines fair value for financial reporting and establishes a framework for measuring fair value on a consistent and comparable basis including required disclosures.
Is FASB ASC 820 based on the specific entity?
No, it is a market-based measurement and is not entity-specific
What is fair value under FASB ASC 820?
The price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions
(that is, an exit price at the measurement date from the perspective of a market participant that holds the
asset or owes the liability).
Under FASB ASC 820, what should a reporting entity do with respect to reliance on inputs?
Maximize observable inputs and minimize unobservable inputs
Under FASB ASC 820, is a reporting entity’s intent to hold an asset or to settle/fulfill a liability relevant to fair value?
No because it is measured from the market participants perspective
Does FASB ASC 820 fair value apply to shareholders’ equity?
Yes
What is the scope of FASB ASC 820?
applies to financial and non-financial assets and liabilities measured at fair value, except those relating to share-based payment transactions (FASB ASC 718, Compensation—Stock Compensation).
clarifies that it is not applicable for
– standards permitting practicability exceptions to fair value,
– vendor-specific objective evidence of fair value, and inventory pricing.
addresses how to measure fair value, not what or when to measure fair value.
Under FASB ASC, what is the definition of an orderly transaction?
A transaction that assumes exposure to the
market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities.
Under FASB ASC, what is the definition of market participants?
Buyers and sellers in the principal (or most advantageous) market for the asset or liability that are
independent of each other—that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms;
knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary;
able to enter into a transaction for the asset or liability; and
willing to enter into transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
What is the definition of principal market under FASB ASC?
The market with the greatest volume and level of activity for the asset or liability.
What is the definition of most advantageous market under FASB ASC?
The market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs.
Under FASB ASC 820, if there is a principal market for an asset or liability, should the fair value reflect that price even if there is a different market that is potentially more advantageous?
Yes
Can the principal market for the same asset or liability be different for different entities under FASB ASC 820?
Yes depending on access to the principal market
Does the reporting entity have to be able to sell the asset or liability at the measurement date in the principal market assuming it has access under FASB ASC 820?
No
Under FASB ASC 820, fair value assumes that market participants do what?
Act in their economic best interests
Under FASB ASC 820, do specific market participants need to be identified?
No, but an analyst may identify attributes like strategic acquirers (with synergies) or financial buyers (no synergies)
Under FASB ASC 820, does the price adjust for transaction costs?
No
What is the definition of highest and best use under FASB ASC 820?
The highest and best use of a nonfinancial asset might provide maximum value to market participants through its use in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (for example, a business) or on a standalone basis.
What does the highest and best use of a nonfinancial asset take into account?
What is physically possible, legally permissible, and financially feasible.
What if the reporting entity’s current use of a nonfinancial asset is different than the highest and best use?
Highest and best use is determined from the perspective of market participants and may not be the same as the current use by the reporting entity; however, the current use is presumed to be highest and best use unless market or other factors suggest a different highest and best use.
What is the entry price?
The transaction price paid to acquire the asset or received to assume a liability
What is the exit price?
The transaction price that would be received to sell the asset or paid to transfer the liability
Under what conditions would result in the transaction price not representing fair value of an asset/liability at initial recognition under FASB ASC 820?
- Related party transaction
- Transaction under duress
- Unit of account differs of the transaction differs from the unit of account when measured at fair value (e.g., during a business combination when you acquire a group of assets, includes unstated rights and privileges, or includes transaction costs)
- Different market from principal market or most advantageous market
What valuation approaches are widely used under FASB ASC 820?
Income approach, market approach, and cost approach