Fair Value Flashcards
What is the definition of FV
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement data
EXIT PRICE
who does FV keep in mind
market participants (market based approach) not entity-specific for a hypothetical transaction
what does an orderly market assume
the asset/liability is exposed to the market before the measurement date for a period that is usual and customary to allow for information
what is the fair value framework
a framework meant to provide guidance on how to apply fair value
What is the first step to the FV framework
identify the asset/liability subject to FV measurement and determine if it is financial or non-financial
What does it mean to identify the asset/liability
consider the characteristics and attributes that the market participant would consider that would affect its value
what are costs that are considered in determining fair value
- transportation
- transformation
what are costs that are not considered in determining fair value
transaction costs (cost to sell for the company) because they are focused on the company and not a participant
what does it mean if the asset/liability is financial?
assets and liabilities can convert directly to cash (debt, equity, notes payable)
what does it mean if an asset/liability is non-financial
asset or liability does not convert directly to cash (land, building)
What does it mean to consider units of accounts or unit ofvaluation
unit of account: an accounting consideration that determines the level at which an asset is aggregated or disaggregated
what does it mean if an asset (liability) is evaluated by unit of account
evaluated on its own (individual piece)
what does it mean if an asset (liability) is evaluated by unit of valuation
unit may be grouped together for valuation purposes
Ex: machinery used but needed with other pieces to achieve its value
What is the highest and best used concept
it is the framework for a non-financial asset
valuation premises: you decide value by determining what use of the asset would maximize benefits to market participants
What does a combined premise mean in terms of highest or best use
assets provide maximum benefits through its use in combination with other assets
what does a stand-alone premise mean in highest and best use
maximum benefit comes from the asset standing alone
what intent does highest and best use keep in mind
market participant assumptions, acting in their economic best interest
what does principal or most advantageous market mean
you go with FV in the principal market, if no principal market exists you go with FV in most advantageous market
what does it mean to be a principal market
market in which the reporting entity would normally enter into a transaction with the greatest volume and level of activity
what must the entity have in order to consider it a principal market
access into the market
what does the most advantageous market mean
market that maximized the amount that would be received to sell the asset or minimize the amount that would be paid to transfer the liability after taking in account transaction and transportation costs
what cost is considered to determine the most advantageous market
transaction costs
how does market activity affect FV
the fair value of the quoted price needs to be in an active market
if there has been a significant decrease in volume or level of activity then an adjustment to the quoted price may be needed
what are factors to consider that could indicate a decrease in activity in a market
- few recent transactions
- price is not based on current information
- wide bid-ask spreads
- increase in liquidity risk premiums
what is the definiton of an active market
a market in which transactions for the asset/liability takes place with sufficient frequency and volume to provide quoted prices on an ongoing basis
Transactions are NOT orderly if:
- there is not adequate exposure to the market
-the transaction was usual but only marketed to one market participant - seller near bankruptcy (distressed or forced sale)
- transaction price is an outlier
what must market participants have
willingness and ability to transact at FV
what is the objective of using a valuation technique
estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at measure day
what is the market approach
uses prices and other relevant information generated by market transactions involving identical or comparable assets/liabilities
what is the income approach
uses valuation techniques to convert future amounts to a single present amount (considers future amounts)
what is the cost approach
based on the amount that would currently be required to replace the service capacity of an asset
when may multiple valuation techniques be useful
when there has been a decrease in volume and activity
what is the purpose of the fair value heiarchy
to provide users with the relative reliability of various fair value measurements
What is the definition of a Level 1
observable, Quoted prices in an active market, for identical assets or liabilities that the reporting entity can access at the measurement date
how should an entity treat a third party quote
with less reliance
Level 2
based on quoted market prices that are observable for identical assets but instead may be based on similar assets
what is a Level 3
unobservable inputs that reflect company assumptions
