Fair Value Framework Flashcards
- What does ASC 820 say about share based payment transactions
specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
- In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account what is…
1) physically possible
2) legally permissible
3) financially feasible
- Definition of Fair Value is…
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.
Exit Price
- What are the steps to determine fair value?
1) Identify principal or most advantageous market
a. Principal market is the market available to the entity with the greatest volume and level of activity
b. Most advantageous market is the market available to the entity that maximizes selling price or minimizes transfer price
i. Determination of most advantageous market would include the cost to transact in that market (transaction costs)
2) Once principal or most advantageous market is identified, fair value from that market:
a. Should not be adjusted for transaction cost
b. Should be adjusted for cost of transporting the item to market (transportation cost)
- Can a debt investment classed as held-to-maturity be measured at FV?
Yes, a debt inv. classed as HTM has the option to be valued at FV. Traditionally, debt investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity.
- What is the appropriate value for determining the fair value of an asset or a liability?
Exit Price
- What are the three valuation techniques (or approaches) that should be used in determining fair value for the purposes of generally accepted accounting principles?
1) Market approach - uses prices and other relevant ino generated by market transactions
2) Income approach - converts future amounts to a single present amount. Discounting future cash flows
3) Cost approach - uses the amount that currently would be required to replace the service capacity of the asset
Remember “MIC”
- What are the levels of FV heirarchy?
Level 1 - highest level. inputs are unadjusted quoted prices
Level 2 - inputs observable for assets or liabs, either directly or indirectly
Level 3 - lowest level. inputs unobservable for assets/liabs
- What is the blockage factor?
Quoted prices SHOULD NOT be adjusted because the entity holds a sizable position in the asset or liability relative to a he trading volume in the market - often referred to as the “blockage factor”
- What is the purpose of disclosures required of a firm that elects to use the fair value measurement?
1) to compare across firms
2) to compare within the firm
- In consolidated financial statements, is the parent able to elect to report debt investment’s HTM @ FV of subsidiaries that have elected to report their HTM investments at amortized cost?
YES!
the parent may elect to report not just its own debt investments held-to-maturity and those of subsidiaries that hold @ FV but ALL of the debt invstmts HTM @ FV in its consol’d F/S’s (only), whether or not the fair value option was elected by its sub’s for their separate books and any separate reporting purposes.
11.For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, “Fair Value Measurement,” not apply?
- Accounts receivable.
- Investments in debt securities to be held-to-maturity.
- Investments in equity securities held for trading.
- Inventory reported at lower of cost or market.
Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, “Fair Value Measurement.” The use of lower of cost or market valuation places upper (“ceiling”) and lower (“floor”) limits on the measurement of “market” that may not result in a true fair value measurement. Thus, the measurement of inventory at “market” is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.
