Fair Value Framework Flashcards
Report Investment using Fair Value Option
% of outstanding Stock * Dividends Paid =
+ Increase in Fair Value of Investment
The determination of fair value is based on
Hypothetical Transactions and on the use of a hypothetical exit price.
In determining the fair value of an asset the most advantageous market, the market based exit price would be adjusted for
Transportation cost to get the asset to the principal or most advantageous market
What cost is not adjusted to the most advantageous market
Transaction cost.
The highest and best use of a non-financial asset to market participants may occur either
Principally through hits use with other assets or principally on the price that would be received to sell the asset.
The guidance for determining fair value provided in the fair value framework is not appropriate for
Determining the fair value of services in exchange for entity’s common stock.
In determining the fair value of a non financial asset
How the reporting entity would use the asset would not be taken into account in assessing the highers and best use of the asset.
Fair Value Measurement must followed
whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.
Fair value for an asset or liability is measured as the
Price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants, that is, fair value is measured as an exit price.
Income approach to fair value measurement
An asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.
A parent form may report all investments as
Held to maturity at Fair Value in its Consolidated Statements only. Whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.
Held to Maturity at Fair Value may be reported by which entities
An entity may elect to measure and report an investment classified as held to maturity at fair value.
What is the appropriate basis for determining the fair value of an asset or liability
The Exit Price
When fair value is determined as the amount that currently would be required to replace the service capacity of an asset
The cost Approach has been Used
Investment in a subsidiary that is to be consolidated mea
A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset Investment in subsidiary will be eliminated in the consolidating process and be replaced by the subsidiary’s assets and liabilities on the consolidated balance sheet.
Amount of change in fair value resulting from a change in the valuation approach would be reported as an
accounting estimate change
What is an entry price
Amount paid to acquire an asset or received to assume a liability
What is an Exit Price
Amount received to sell an asset or paid to transfer a liability
Reasons Entry Price
Transaction is between related parties
seller is under duress
Unit of account/measure is different than basis for fair value determination
Market is different than market for fair value determination
Approaches for Fair Value Determination
Market Approach
Income Approach
Cost Approach
Entry Assume an increase in Fair Value of an Asset
Dr: Asset
Credit Unrealized Gain - Fair Value Option
In Fair Value Hierarchy what is the highest or most desirable level and what is the lowest or least desirable level
1 is the Highest Most Desirable
3 is the Lowest Least Desirable
Inputs assumptions used to determine fair value may be:
Observable - Market Data
Un-Observable - Probability Assumptions
Blockage Factor
Occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market.
Using a blockage factor would adjust the market value of the impact of such a large block of securities being sold, but not permitted in determining fair value.
What is the intended purposes of financial statement discloses required
To facilitate comparisons both across firms and for differently measured financial assets and liabilities of a single firm.
Fair value measurement disclosures require both that fair value amounts be disclosed
Separately for each level of the fair value hierarchy and that quantitative disclosures be provided in tabular format.
Disclosure requirements when fair value measurements is used are differentiated between items
measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period. Items measured at fair value on a non recurring basis are adjusted to (measured at) fair value only when certain conditions are met.
Firms which elect to measure financial assets and financial liabilities at fair value are required to make significant additional disclosuresin both
Interm (quarterly) and annual financial statements.
