F2-M6-Fair Value Measurements

Question 1

Define Fair Value

Answer 1

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date

Question 2

Describe the valuation techniques that can be used to measure the fair value of an asset or liability

Answer 2

1. Market approach - Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.
2. Income approach - Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities
3. Cost approach - Uses current replacement cost to measure the fair value of assets

Question 3

Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

Answer 3

1. Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities
2. Level 2 Inputs -Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability.
3. Level 3 Inputs - Unobservable inputs for the asset or liability that reflect the entities’ assumptions and are based on the best available information.

Note: Level 1 inputs have the highest priority