F2 - M4 - Fair Value Measurements

Question 1

Fair Value Measurements

Answer 1

GAAP & IRRS have “standardized” definition, “Exit price”

• Does not include; shared-based compensation, vendor specific evidence, leases

Question 2

Fair Value defined

Answer 2

exit price, get out and want FV, price received to sell asset or paid to transfer liability, orderly (not fire sale), at measurement date, current market conditions

• Market based measure, not entity
• Principal market or most advantageous market if no principal market
• Reflect all assumptions that market participants would use
• Does not include transaction costs BUT may include transportation costs
• Nonfinancial asset, PPE, highest and best use

Question 3

Orderly transaction

Answer 3

can’t be forced

Question 4

Market participants

Answer 4

independent, not related parties

Question 5

Principal market

Answer 5

greatest volume or level of activity; if no principal market, most advantageous market (best price for asset) after transaction costs

Question 6

Highest and Best Use – Nonfinancial assets – PP&E,

Answer 6

• Lia

Question 7

Fair Value Measurement Framework

Answer 7

Valuation Techniques “MIC”
o Market Approach
 Prices and other relevant info, “exchange”

o Income Approach
 PVFCF, future amounts, cash flows or earnings, discounted to measure FV

o Cost Approach
 Current replacement costs to measure FV

Question 8

Hierarchy of Inputs

Answer 8

• Level 1 Inputs – active markets for identical assets
• Level 2 Inputs
  o Similar assets / liabilities in active markets
  o Identical or similar assets in nonactive markets
• Level 3 inputs – unobservable inputs, “assumptions”, future CF, I think, estimates

Question 9

Fair Value Disclosures – MIC and Inputs

Answer 9

• Quantitative info on level 3 inputs
• Sensitivity of level 3 inputs
• Description of valuation process
• Transfers between levels 1 and 2

Question 10

Exceptions to Fair Value Measurement

Answer 10

• Not practicable to measure FV
• FV cannot be reasonably determined
• FV cannot be measured with sufficient reliability