F2M6

Question 1

Definition of fair value

Answer 1

the price that would be received if you sold an asset or transferred a liability in a regular transaction between regular market participants in the principal (or most advantageous) market at the measurement date under current market conditions.

fair value is an exit price.
reflect all assumptions a market participant would make.
does not include transaction costs, but maybe transportation if location is key.
non financial asset: assumes highest and best use.
fair value of a liability should include nonperformance risk.
FV of an equitys own instrument should be measures from the perspective of a market participant who holds the instrument as an asset.

Question 2

Fair value measurement assumes that a liability or an entity’s own equity instrument is transferred to a market participant at the measurement date and assumes:

Answer 2

the liability/equity interest would remain outstanding and not be settled, canceled, or extinguished on the measurement date.

Question 3

Orderly transaction definition

Answer 3

a transaction in which the asset or liability is exposed to the market, for a period before the measurement date, for long enough to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities.

Cannot be a forced transaction

Question 4

Market Participant definition

Answer 4

buyers and sellers who are independent, knowledgeable about the asset/liability, able to transact for the asset/liability, and willing to transact for the asset/liability. They are also considered to be acting in their economic best interest.

Question 5

Principal Market definition

Answer 5

market with the greatest volume or level of activity for the asset/liability. The reporting entity must have access to the principal market at measurement date. The price in the principal market will be the fair value measurement.

Question 6

Most advantageous market definition

Answer 6

market with the best price for an asset (maximized selling price of the asset) or liability (minimized payment to transfer liability), after considering transaction costs even though they are not included in the final fair value measurement. Only use the price in the most advantageous market if there is no principal market.

Question 7

if a reporting entity acquires land that currently has a factory on it, but other similar sites were developed or residential and retail purposes, how do you determine the highest and best use of the land?

Answer 7

1: consider value of land as it currently is. value of land + value of assets/liabilities associated with land (building costs and debt on the land/building)
2. consider value of land if it was vacant for residential use. cost of tearing down factory and related costs are considered as well as uncertainty in converting the land to a vacant site for residential and retail space.
3: fair value is then the highest of either of these values.

Question 8

Highest and best of nonfinancial assets:

Answer 8

fair value measurement takes into account the market participants ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use

A reporting entitys current use of a nonfinancial asset is presumed to be its highest and best use, unless factors suggest that a different use by market participants would maximize the value of the asset.

Highest and best use could be that its used in a combination or stand alone

Question 9

Market approach

Answer 9

uses price and other relevant market transactions involving identical or comparable assets/liabilities to measure fair value

Question 10

Income approach

Answer 10

converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value. Can be applied to assets or liabilities.

Question 11

Cost approach

Answer 11

only assets. Uses replacement cost to measure fair value.

Question 12

Hierarchy of inputs

Answer 12

level 1 is the best.

the level in which the fair value falls is determined by the lowest level input that is significant that is used in the measurement.

minimize use of level 3

Question 13

Change in value of fair value is treated as:

Answer 13

a change in accounting estimate and applied prospectively

Question 14

level 1 inputs

Answer 14

quoted prices in active markets for identical assets/liabilities that reporting entity has access to at measurement date. Quoted prices may be obtained from exchange, dealer, brokered, and principal-to-principal markets. Level 1 is the most reliable measure.

Question 15

Level 2 inputs

Answer 15

inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Includes:
* Quoted prices for similar items in active markets
* Quoted prices for identical or similar assets in non active markets.
* Quoted prices for identical liabilities when traded as assets, if adjustments to the quoted market price of the assets are required.
* Quoted prices for similar liabilities when traded as assets
* Inputs other than quoted prices that are observable for the asset or liability
* Inputs that are derived from or corroborated by observable market data.

Question 16

Level 3 inputs

Answer 16

unobservable inputs that reflect the reporting entity’s assumptions and should be based on the best available information. Should only be used when there are no level 1 or 2 inputs or when the cost and effort required to obtain them is too much.

Question 17

Fair value is an:

Answer 17

exit price.

costs to sell an asset (not acquired)

paid to transfer a liability (not assume it)

Question 18

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on?

Answer 18

an instrument-by-instrument basis

Question 19

The fair value of an asset or liability is not contingent upon:

Answer 19

the sellers decision to decline the transaction price.

it is still what would have been received to sell an asset or paid to transfer a liability

Question 20

What type of input are projected cash flows?

Answer 20

unobservable inputs