Fair Value

Question 1

What is the definition of FV

Answer 1

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

Question 2

who does FV keep in mind

Answer 2

market participants (market based approach) not entity-specific for a hypothetical transaction

Question 3

what does an orderly market assume

Answer 3

the asset/liability is exposed to the market before the measurement date for a period that is usual and customary to allow for information

Question 4

what is the fair value framework

Answer 4

a framework meant to provide guidance on how to apply fair value

Question 5

What is the first step to the FV framework

Answer 5

identify the asset/liability subject to FV measurement and determine if it is financial or non-financial

Question 6

What does it mean to identify the asset/liability

Answer 6

consider the characteristics and attributes that the market participant would consider that would affect its value

Question 7

what are costs that are considered in determining fair value

Answer 7

• transportation
• transformation

Question 8

what are costs that are not considered in determining fair value

Answer 8

transaction costs (cost to sell for the company) because they are focused on the company and not a participant

Question 9

what does it mean if the asset/liability is financial?

Answer 9

assets and liabilities can convert directly to cash (debt, equity, notes payable)

Question 10

what does it mean if an asset/liability is non-financial

Answer 10

asset or liability does not convert directly to cash (land, building)

Question 10

What does it mean to consider units of accounts or unit ofvaluation

Answer 10

unit of account: an accounting consideration that determines the level at which an asset is aggregated or disaggregated

Question 11

what does it mean if an asset (liability) is evaluated by unit of account

Answer 11

evaluated on its own (individual piece)

Question 12

what does it mean if an asset (liability) is evaluated by unit of valuation

Answer 12

unit may be grouped together for valuation purposes

Ex: machinery used but needed with other pieces to achieve its value

Question 13

What is the highest and best used concept

Answer 13

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

Question 14

What does a combined premise mean in terms of highest or best use

Answer 14

assets provide maximum benefits through its use in combination with other assets

Question 15

what does a stand-alone premise mean in highest and best use

Answer 15

maximum benefit comes from the asset standing alone

Question 16

what intent does highest and best use keep in mind

Answer 16

market participant assumptions, acting in their economic best interest

Question 17

what does principal or most advantageous market mean

Answer 17

you go with FV in the principal market, if no principal market exists you go with FV in most advantageous market

Question 18

what does it mean to be a principal market

Answer 18

market in which the reporting entity would normally enter into a transaction with the greatest volume and level of activity

Question 19

what must the entity have in order to consider it a principal market

Answer 19

access into the market

Question 20

what does the most advantageous market mean

Answer 20

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

Question 21

what cost is considered to determine the most advantageous market

Answer 21

transaction costs

Question 22

how does market activity affect FV

Answer 22

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

Question 23

what are factors to consider that could indicate a decrease in activity in a market

Answer 23

• few recent transactions
• price is not based on current information
• wide bid-ask spreads
• increase in liquidity risk premiums

Question 24

what is the definiton of an active market

Answer 24

a market in which transactions for the asset/liability takes place with sufficient frequency and volume to provide quoted prices on an ongoing basis

Question 25

Transactions are NOT orderly if:

Answer 25

• 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

Question 26

what must market participants have

Answer 26

willingness and ability to transact at FV

Question 27

what is the objective of using a valuation technique

Answer 27

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

Question 28

what is the market approach

Answer 28

uses prices and other relevant information generated by market transactions involving identical or comparable assets/liabilities

Question 29

what is the income approach

Answer 29

uses valuation techniques to convert future amounts to a single present amount (considers future amounts)

Question 30

what is the cost approach

Answer 30

based on the amount that would currently be required to replace the service capacity of an asset

Question 31

when may multiple valuation techniques be useful

Answer 31

when there has been a decrease in volume and activity

Question 32

what is the purpose of the fair value heiarchy

Answer 32

to provide users with the relative reliability of various fair value measurements

Question 33

What is the definition of a Level 1

Answer 33

observable, Quoted prices in an active market, for identical assets or liabilities that the reporting entity can access at the measurement date

Question 34

how should an entity treat a third party quote

Answer 34

with less reliance

Question 35

Level 2

Answer 35

based on quoted market prices that are observable for identical assets but instead may be based on similar assets

Question 36

what is a Level 3

Answer 36

unobservable inputs that reflect company assumptions