F10: Fair Value Measurement

Question 1

Fair Value definition

Answer 1

The price that would be received to sell an asset OR paid to transfer a liability

Question 2

Fair Value AKA

Answer 2

“Exit Price”

Question 3

Fair value is a _______-based measure, not a _____-based measure

Answer 3

Market-based measure, not an entity-based measure

Question 4

Fair value is measured in what market?

Answer 4

Principal market

Question 5

Fair value does not include what?

Answer 5

Transaction costs

Question 6

Orderly transaction definition

Answer 6

Asset or liability is exposed to the market for a period of time before measurement date

Question 7

Orderly transaction is not a what transaction?

Answer 7

Forced

Question 8

The Principal Market is what?

Answer 8

• The first option

- The market with the greatest volume or level of activity

Question 9

The Most Advantageous Market is what?

Answer 9

• The second option

- The market with the best price for the asset or liability, after considering transaction costs

Question 10

In a most advantageous market, what is not included in fair value measurement?

Answer 10

Transaction costs

Question 11

3 Valuation Techniques

Answer 11

1- Market Approach
2- Income Approach
3- Cost Approach

Question 12

Valuation technique selection should maximize what?

Answer 12

-Maximize the use of observable inputs and minimize the use of unobservable inputs

Question 13

A change in Valuation Technique is treated how?

Answer 13

As a change in accounting estimate (prospectively)

Question 14

Market Approach definition

Answer 14

Uses prices and other info from the market of comparable assets/liabilities

Question 15

Income Approach definition

Answer 15

Uses PV of discounted cash flows (future amounts)

Question 16

Cost Approach definition

Answer 16

Uses current replacement costs

Question 17

What is the Heirarchy of Inputs?

Answer 17

• Level 1 Inputs (highest priority)
• Level 2 Inputs
• Level 3 Inputs (lowest priority)

Question 18

Level 1 Inputs

Answer 18

= Identical

-Quoted prices in active markets for identical assets/liabilities on the measurement date

Question 19

What Level is the most reliable level and should be used if available?

Answer 19

Level 1

Question 20

Level 2 Inputs

Answer 20

= Similar

• Quoted prices in active markets for similar
• Quoted prices in nonactive markets for similar

Question 21

Level 3 Inputs

Answer 21

= Discounted cash flows

-Unobservable inputs for the asset/liability

Question 22

When should Level 3 Inputs be used?

Answer 22

Only when no observable inputs or when undue cost and effort is required to obtain observable inputs