Fair Value Flashcards
Changes in FV resulting from changes in valuation techniques/application are treated as
Changes in accounting estimates.
Which of the following statements is correct regarding fair value measurement?
a. Fair value is a market-based measurement. b. Fair value is an entity-specific measurement. c. Fair value measurement does not consider risk. d. Fair value measurement does not consider restrictions.
Market-based measurement.
A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets: Market Quoted Price A $20,000 B 25,000 C 30,000 D 35,000
What is the fair value of the financial asset?
In the absence of a principal market, the entity would use the most advantageous market to determine the fair value for an asset or liability. The most advantageous market is the one in which the entity could sell the asset at a price that maximizes the amount that would be received for the asset. Market D has a quoted price of $35,000, which is the highest price for the asset. Therefore, it is the most advantageous.
Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?
a. Provide a uniform definition of "fair value" for GAAP purposes. b. Provide a framework for determining fair value for GAAP purposes. c. Establish new measurement requirements for financial instruments. d. Establish expanded disclosures about fair value when it is used.
Establish new measurement requirements for financial instruments.
Establishing new measurement requirements for financial instruments, or for any other asset or liability, is not one of the purposes of the fair value framework. Measurement requirements or elections are determined by other pronouncements; the “Fair Value Measurement” pronouncement establishes standards to be followed in determining (measuring) fair value when it is used.
For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?
a. Determination of the fair value to be assigned to land acquired in a business combination b. Determination of the fair value of a bond liability for applying the fair value option c. Determination of the fair value of legal services received in exchange for an entity's common stock d. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred
Determination of the fair value of legal services received in exchange for an entity’s common stock.
ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
The determination of fair value may be for:
a. Stand-alone Asset or Liability
b. A Group of Assets or Liabilities
c. Both
d. None
Both.
While the determination of fair value is for a particular (identified) asset or liability, that asset or liability, in fact, may be either a stand-alone asset or liability (e.g., a financial instrument or an operating asset) or a group of assets or liabilities taken as a unit (e.g., an asset group or a line of business).
In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for
a. Transaction Cost
b. Transportation Cost
c. Both
d. The market-based exit price should not be adjusted for either transaction costs nor transportation costs in determining an asset’s fair value.
Transportation cost only.
In determining the fair value of an asset in the most advantageous market, the market-based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.
In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following?
a. What is physically possible b. What is financially feasible c. How the reporting entity would use the asset d. What is legally permissible
How the reporting entity would use the asset.
In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.
Principal market refers to
The market that has the greatest volume and level of activity for the asset
Which of the following is an appropriate cost approach for determining fair value measurements?
a. Using relevant information from recent transactions b. Using present value techniques to discount cash flows c. Using the current replacement cost of the asset d. Using the undiscounted cash flows from the asset
Current replacement cost adjusted for obsolescence can be used for determining fair value measurements under the cost approach.
Which of the following is true for valuing an asset at fair value?
a. The price of the asset should be adjusted for transaction costs. b. The fair value of the asset should be adjusted for costs to sell. c. The fair value price is based upon an entry price to purchase the asset. d. The price should be adjusted for transportation costs to transport the asset to its principal market.
If location is an attribute of the asset, the price in the principal market should be adjusted for costs to transport the asset to its principal or most advantageous market.
Most advantageous market refers to
The market that maximizes the proceeds received for the asset.
“Highest and best use” only applies to ____ assets and does not apply to ______ assets.
“Highest and best use” only applies to non financial assets (e.g., patent; PP&E) and does not apply to financial assets.
