F10: Fair Value Measurement Flashcards
Fair Value definition
The price that would be received to sell an asset OR paid to transfer a liability
Fair Value AKA
“Exit Price”
Fair value is a _______-based measure, not a _____-based measure
Market-based measure, not an entity-based measure
Fair value is measured in what market?
Principal market
Fair value does not include what?
Transaction costs
Orderly transaction definition
Asset or liability is exposed to the market for a period of time before measurement date
Orderly transaction is not a what transaction?
Forced
The Principal Market is what?
- The first option
- The market with the greatest volume or level of activity
The Most Advantageous Market is what?
- The second option
- The market with the best price for the asset or liability, after considering transaction costs
In a most advantageous market, what is not included in fair value measurement?
Transaction costs
3 Valuation Techniques
1- Market Approach
2- Income Approach
3- Cost Approach
Valuation technique selection should maximize what?
-Maximize the use of observable inputs and minimize the use of unobservable inputs
A change in Valuation Technique is treated how?
As a change in accounting estimate (prospectively)
Market Approach definition
Uses prices and other info from the market of comparable assets/liabilities
Income Approach definition
Uses PV of discounted cash flows (future amounts)
Cost Approach definition
Uses current replacement costs
What is the Heirarchy of Inputs?
- Level 1 Inputs (highest priority)
- Level 2 Inputs
- Level 3 Inputs (lowest priority)
Level 1 Inputs
= Identical
-Quoted prices in active markets for identical assets/liabilities on the measurement date
What Level is the most reliable level and should be used if available?
Level 1
Level 2 Inputs
= Similar
- Quoted prices in active markets for similar
- Quoted prices in nonactive markets for similar
Level 3 Inputs
= Discounted cash flows
-Unobservable inputs for the asset/liability
When should Level 3 Inputs be used?
Only when no observable inputs or when undue cost and effort is required to obtain observable inputs
