Fair Value

Question 1

Definition of Fair Value

Answer 1

The 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 date.

• not a distressed sale
• measured at transaction date
• participants are independent, willing, able, & knowledgeable

Question 2

Fair Value Measurement is NOT used for:

i.e., ASC 820 does not apply to:

Answer 2

1. Share-based payment transactions
2. Measurements using vendor-specific objective evidence of fair value
3. Purposes of inventory pricing
4. Lease classification or measurement
5. Any situations where practicability exceptions to fair value measurement are permitted

Question 3

Transaction/Transportation Costs

Answer 3

Used to determine the most advantageous market, but TRANSACTION costs are NOT used in determining fair value measurement

Question 4

Highest and Best Use of an asset may be:

Answer 4

1. In-use: Max value to market participants would occur through use of asset in combination with other assets
2. In-exchange: Max value to market participants would occur on a stand-alone basis (the price used to sell the asset)

Question 5

Entry Price (or Transaction Price)

Answer 5

The price paid to acquire an asset or the price received to assume the liability.

Question 6

Exit Price (or Fair Value)

Answer 6

The price that would be received to sell an asset or paid to transfer a liability.

Question 7

Valuation Techniques/Approaches

Answer 7

1. Market Approach
2. Income Approach
3. Cost Approach

Question 8

Market Approach

Answer 8

Uses prices and relevant information from market transactions involving asset or liabilities identical or comparable to those being valued.

Question 9

Income Approach

Answer 9

Converts future amounts to a single present value. (discounted present value of future cash flows)

Question 10

Cost Approach

Answer 10

Uses the amount that currently would be required to replace the service capacity of an asset, adjusting for obsolescence. (i.e. current replacement cost, adjusted)

Question 11

Instruments NOT eligible for fair value option

Answer 11

1. An investment in a subsidiary that is to be consolidated
2. An interest in a variable interest entity (VIE) that is to be consolidated
3. Employee-oriented benefit plans
4. Financial assets and liabs recognized under lease accounting
5. Demand deposit liabs of financial institutions
6. Components of shareholders’ equity

Question 12

Accounting at fair value election date

Answer 12

Difference between carrying value and fair value recorded as unrecognized gain or loss to income

Question 13

Changes to valuation techniques or applications are treated as:

Answer 13

Changes to accounting estimates

Question 14

Three Levels of Inputs

Answer 14

1. Level 1
2. Level 2
3. Level 3

Question 15

Level 1 Inputs

Answer 15

Involve the use of observable data from actual market transactions, from an active market, for identical assets or liabs

Question 16

Level 2 Inputs

Answer 16

Involve the use of observable data from actual market transaction, BUT either:

1. the transaction did not occur in an active market, or
2. the transaction relates to similar, but not identical, assets or liabs

Question 17

Level 3 Inputs

Answer 17

Involve the use of un-observable data and are largely based on management’s judgment (e.g forecasts, etc.)

Question 18

Factors considered when applying the EXPECTED CASH FLOW APPROACH

Answer 18

1. Risk
2. Timing
3. Interest
   This approach uses the weighted average of possibilities to calculate the expected value of cash flow to be received.

Question 19

Traditional Cash Flow Approach

Answer 19

Assumes that the cash flow with the most likelihood will be selected