Fair Value Framework Flashcards
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
Fair Value
how to measure fair value not when to measure fair value
Fair value definition focuses
Fair value is market-based measurement or an entity-specific measurement
Fair value is a market-based measurement
True or False:
Fair value determination should consider the attributes of the specific asset or liability being measured
True
True or False:
hypothetical transaction at the measurement date is not a transaction that would occur in a forced liquidation or distress sale
True
market is the one with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability
Principal market
market is the one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability
Most advantageous
incremental direct cost to sell the asset or transfer the liability - which do not measure a characteristic of the asset or liability and does not adjust price
Transaction costs
cost incurred to transport the asset or liability to its principal or most advantageous market
(the location characteristic of an asset)
used to adjust fair value for measurement purposes
True or False
although transaction and transportation costs are taken into account in determining the most advantageous market, transaction costs are not used
(i.e., not deducted from the asset market price or added to the liability transfer cost)
in determining the fair value of an asset or liability in the most advantageous market
True
buyers and sellers of the asset or liability that are:
a. Independent of the reporting entity;
b. Acting in their economic best interest;
c. Knowledgeable of the asset or liability and the transaction involved;
d. Able and willing, but not compelled, to transact for the asset or liability.
Market participants
True or False
The determination of fair value of a nonfinancial asset assumes the highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different
(using a limo for CEO as company car instead of as inventory)
True
True or False
The highest and best use must take into account what is
physically possible,
legally permissible and
financially feasible at the measurement date
True
Maximum value to market participants would occur through its use in combination with other assets as a group
In-use
Maximum value to market participants would occur principally on a standalone basis, that is, the price that would be received in a current transaction to sell the (single) asset
In-exchange
True or False
The determination of fair value of a liability assumes that the liability is transferred to a market participant at the measurement date; it is not settled or canceled
True
True or False
The determination of fair value of a liability should consider the effects of the reporting entity’s credit risk (or credit standing) on the fair value of the liability in each period for which the liability is measured at fair value;
a third-party credit enhancement should not be considered
True
True or False
The measurement assumes the instrument is transferred to a market participant at the measurement date and is measured from the perspective of a market participant that holds the instrument as an asset
True
True or False
A separate input or an adjustment to other inputs to account for a restriction that prevents the transfer of a shareholder equity instrument or labilities should not be made in measuring the fair value
True
True or False
An exception to the requirement that fair value of qualified financial assets and financial liabilities be measured separately is permitted when a reporting entity manages risk associated with a portfolio of financial instruments on a net exposure basis, rather than on a gross exposure basis
True
a. The price that would be received to sell a NET asset position for a particular risk, or
b. The price that would be paid to transfer a NET liability position for a particular risk.
An entity that holds financial assets and financial liabilities and manages those instruments on the basis of their net risk exposure may measure the fair value of those financial assets and financial liabilities at
True or False
the content of ASC 820 must be followed when fair value measurement is used, either as required or permitted by other pronouncements
True
True or False
ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items)
True
True or False
If reporting entity has elected to report the investment in another company using the fair value option, it should not recognize its share of the investment company reported net income, but should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.
True
True or False
The determination of fair value is based on a hypothetical transaction and on the use of a (hypothetical) exit price not entry price
True
The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants or on the intended use by the reporting entity
Market participants
taking into account transaction costs and transportation costs when
When there is no principal market for the financial asset, the most advantageous market must be used to determine fair value.
The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs.
Therefore, the quoted price of the asset in the most advantage market, unadjusted for the transaction costs, is fair value.
