F2 M3

Question 1

What is fair value

Answer 1

Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction in the market under current market conditions (it’s the exit price)

Question 2

How is fair value measured

Answer 2

Fair value is measured in the principal market for the asset or liability, or the most
advantageous market in the absence of a principal market

Question 3

what is the principle market

Answer 3

Principal market: Market with the greatest volume or level of activity for the asset or
liability

Question 4

does fair value include transaction costs

Answer 4

Fair value DOES NOT include transaction costs, but MAY include transportation costs if
location is an attribute of the asset or liability (EXCEPTION)

Question 5

What is the most advantageous market for FV measurement

Answer 5

Most advantageous market: Market with the best price for the asset (maximizes selling
price of the asset) or liability (minimizes payment to transfer liability), after considering
transaction costs. Although transaction costs are used to determine the most
advantageous market, transaction costs aren’t included in the final fair value
measurement

Answer 6

In the most advantageous market, TRANSACTION COSTS ARE CONSIDERED

Answer 7

In this kind of market, I would need to subtract the given transaction cost from the price
of the asset (ex: there’s no principal market for a stock that trades in 2 dif exchanges.
One quoted stock price is $52 w/a transaction cost of $6 and the other is $50 w/a
transaction cost of $2. Net effect for both = $46 and $48. The FV of the stock is $50 bc
that is the market that gives the best price for the stock after transaction prices are
considered)

Question 8

is the net price of FV measurement the new price of the asset

Answer 8

The net price is NOT the new price of the asset in the most advantageous market

Question 9

Which asset

Answer 9

The price of the highest asset after subtracting transaction costs is the asset with the
best price (use the original price here to determine its price)

Answer 10

Valuation techniques that comps can use when measuring the FV of an asset or a
liability: Market approach, Income approach, Cost approach, or a combination of
these (MIC)

Answer 11

A change in valuation technique or its application is accounted for as a change in
accounting estimate

Question 12

what is the market approch

Answer 12

Market approach: Uses prices and other relevant info from market transactions involving
identical or comparable assets or liabilities to measure FV (ex: NASDAQ in the stock
exchange)

Answer 13

Income Approach: Converts future amounts, including cash flows or earnings, to a single
discounted amt to measure fair value. This method can be applied to assets or liabilities.
It is the Present Value of Future Cash Flows

Question 14

what is the cost approach

Answer 14

Cost approach: Uses current replacement cost to measure fair value of assets

Question 15

what are the hierarchy of inputs

Answer 15

Hierarchy of inputs: The fair value hierarchy prioritizes the inputs that can be used in the
valuation techniques. Level 1 inputs have highest priority and level 3 inputs have the

lowest priority. Valuation techniques should maximize the use of observable inputs (level
1 and 2) and minimize the use of unobservable inputs (level 3)

Question 16

what are level 1 inputs

Answer 16

Level 1 inputs: Quoted prices in active markets for identical assets or liabilities that the
reporting entity has access to on the measurement date. Prices can be obtained from
places such as NYSE and dealer markets (most reliable measures of fair value)

Question 17

what are level 2 inputs

Answer 17

Level 2 inputs: Inputs other than quoted market prices (level 1) that are directly or
indirectly observable for the asset or liability

Question 18

what are level 3 inputs

Answer 18

Level 3 inputs: Unobservable inputs for the asset or liability. Unobservable inputs reflect
the reporting entity’s assumptions (future cash flows and disc rate) and should be based
on the best available info. Level 3 inputs should only be used when there are no
observable (level 1 or level 2) inputs or when undue cost and effort is required to obtain
observable inputs

Answer 19

Exemptions to the req to measure fair value exist when: (1) it isn’t practicable to
measure it, (2) FV can’t be reasonably determined, (3) or FV can’t be measured with
sufficient reliability