Fair Value Framework

Question 1

Define Fair Value

Answer 1

The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants

Question 2

What is the principle market?

Answer 2

Market with greatest volume and level of activity for the asset or liability for the asset being sold

Question 3

What is the most advantageous market?

Answer 3

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 a liability

Question 4

In determining the most advantageous market, can you consider transaction costs?

Answer 4

YES!

Question 5

In determining the FAIR VALUE in the most advantageous market, do you consider the transaction costs?

Answer 5

NO! You would book the FV not including the transaction costs!

Question 6

If there is no determinable FV, what method do you use?

Answer 6

Net Asset Value (for financial assets/liabilities only). Take the FV of the asset held, less FV of the liabilities. If the entity carries both the asset and liability at fair value.

Question 7

What are the qualifications of a market participant?

Answer 7

1) Independent from the reporting entity
2) Acting in their own best economic interests
3) Knowledgeable of the asset or liability and the transaction involved
4) Able and willing, but not compelled, to transact for the asset or liability

Question 8

What is the difference between replacement costs and fair value?

Answer 8

Fair value is price that would be received and fair value is the price that you would pay