F2 - M6 - Fair Value Measurements Flashcards
For the fair value, how is this measured?
This is like an exit price if the item was sold today, and normally these items are valued based upon the market.
For example, principle market for the asset or liability. So, you have stock, what is the value of that stock on the market today? That is fair value.
If there is no principle market, than you want to use the most advantageous market available.
Does the fair value include transaction costs?
No, but it might include transportation costs if that is an important measure of the asset or liability.
You do use transaction costs to determine the most advantageous market, but use the fair value in finding fair value.
How would the fair value be measured for a non financial asset or liability?
Non financial asset - Is measured by the highest and best use of the asset. An example of this would be land.
Liability - Should include nonperformance risk, which is the risk that the obligation will not be fulfilled.
What is an orderly transaction for fair value?
The asset or liability is exposed to the market for a while to allow other people to purchase.
It is not a fire sale, or a forced transaction. This might be due to bankruptcy, foreclosure, etc.
What are the requirements of market participants in order to measured at fair value?
Buyers and sellers need to be unrelated,
knowledgeable about the asset or liability
Willing and able to transact.
What determines which principle market you use?
The market with the greatest volume or level of activity, and the reporting entity must have access to that market.
So if you have a stock, the market you will use is the market that holds most of that stock.
What determines the most advantageous market?
The market with the best price for an asset, or the lowest cost for a liability.
What are the valuation techniques? (MIC)
M - Market Approach; this is when companies use other markets weather that is similar transactions or information to value their assets or liabilities.
I - Income Approach; this is when you discount future cash flows to get a measure of the current fair value. Think of time value of money of a stock or bond.
C - Cost Approach; the replacement cost of the item to measure the fair value of the assets.
What is a level 1 input?
These are things that are observable, active, and identical. The best example of this is the stock market.
What is a level 2 input?
These are items that are observable, and you can get prices for similar assets or liabilities in active markets.
What is a level 3 input?
Unobservable, based on entities assumptions. No comparable assets,
bias and least reliable. No other choice, no level 1 or 2.
What are some exceptions to when you cannot use fair value measurements?
It is not practical to use the fair value
Fair value cannot be determined
Fair value cannot be measured with sufficient reliability.
