Fair Value Framework Flashcards
ASC 820
is a framework for how to measure fair value to achieve increased consistency and comparability in fair value measurements
Fair Value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date.
How is FV measured?
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Market Based Measurement
Assets and Liabilities that are measure can be grouped or stand alone
Attributes of Assets and liabilities are considered. Such as conditions, location, restriction on asset use or sale, (etc) are specific asset or liability being measured.
The use of an asset and liability in FV
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FV uses hypothetical transactions at measurement date that would occur under current market conditions; it is not a transaction that would occur in a forced liquidation or distress sale
Transactions in FV
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Doesn’t require a no observable market when determining FV, but it does require a measurement date.
Price is the basis for estimating a transaction ( either an asset or liability).
Principal Market
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Principal Market is 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
Most Advantageous 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.
Application to Assets
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 ; the concept of highest and best use does not apply to measuring the FV of financial assets.
Highest and best use must be physical, legal, and financially feasible at measurement date.
Highest and best use of an asset
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In use - Maximum value to market participants would occur through its use in combination with other assets as a group
In exchange - Maximum value to market participants would occur principally on a stand alone basis
Application to Liabilities
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The determination of fair value of a liability assumes that the liability is transferred to a market participant at the measurement date ( that is not settled or canceled).
Liability Hypothetical Transactions regarding counterparty and nonperformance risks
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The liability to the counterparty (i.e., the party to whom the obligation is due) is assumed to continue after the hypothetical transaction
Nonperformance risk relating to the liability is assumed to be the same after the hypothetical transaction as before the transaction.
Determination of FV of a Liability
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is consider the effects of the reporting entity’s credit risk ( or Credit standing) on the fair of the liability in each period for which the liability is measured at FV, a third party credit enhancement should not be considered.
Preventions ( i.e., adjustments and/or seperate input) that block liability transfer should not measure for FV
Missing quoted price of a liability is held by another identical user party as a asset, the liability should be measured as a asset by the company who quoted the liability.
Application of FV to measure Shareholder’s equity
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1) requirements for the determination of FV must apply to instruments classified in shareholder’s equity that are measured at fair value.
2) measurement assumes the instrument is transferred to a market participant at the measurement date that is measured as an asset.
Application of FV to measure Shareholder’s equity’s inputs and pricing
Missing quoted price of a SE is held by another identical user party as a asset, the SE should be measured as a asset by the company who quoted the SE.
Preventions ( i.e., adjustments and/or seperate input) that block SE transfer should not measure for FV
Application to Net Financial Assets and Financial Liabilities
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Financial Assets and Liabilities cannot be measure by FV separately. However, it 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.
FV of assets and liability’s net risk exposure
An entity (that holds financial assets and liabilities) manages those instruments on the basis of their net risk exposure may measure the FV of financial assets and liabilities at:
1) Selling price of a NET asset’s position for a particular risk
2) Payment price of a NET liability’s position for a particular risk.
ASC 820’s non-application
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Accounting principles that address share-based payment transactions
ASC’s permit measurements that are similar to fair value but that are not intended to measure fair value.
Accounting principles that address fair value measurement for purposes of inventory pricing
ASC’s that permit practicability exceptions to fair value measurement
ASC’s permit measurements that do not measure FV
a) Accounting principles that permit measurements that are determined using vendor specific objective evidence of fair value
b) Accounting principles that address fair value measurement for purposes of inventory pricing
Pervasive Applicability
The content of ASC 820 must be followed when FV measure is used, either as required or permitted by other pronouncements.
Practical Expedient Exception
it measures a company’s FV of an investment that does not have a quoted market price but reports a net asset value per share (i.e.,NAV). For example, hedge funds, private equity funds, real estate funds , venture capital funds, common/collective funds , and offshore funds.
Alternative Investments requirements
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Does not have a readily determinable fair value
The investment meets the criteria for an investment company as stipulated in ASC 940-10-15-2 or does not meet the criteria to be an investment company but follows industry practice and issues financial statements consistent with the measurement principles for an investment company.
Investor’s Classification in the FV Hierarchy
1) The investor is not allowed to look through the alternative investment fund and classify the investment in the fair value hierarchy according to the investments made by the private equity (PE) fund.
NAV guidelines for practical expedient situations
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Alternative investments that are reported at NAV as a practical expedient are not categorized in the FV hierarchy ( level 1, 2, or 3) but are separately report in the footnotes with disclosures that indicate that the NAV is being used and these disclosures must reconcile to the amount reported on the balance sheet
Companies that use NAV as a practical expedient for measure fair value must disclose sufficient information so that financial statement users understand the nature and the risk of the investment. The disclosure must include information about the terms and conditions in which the company can redeem its investments.
Criteria of Practical Expedient Exception
1) Alternative Investments must meet the criteria in order to use NAV as the practice expedient
2) Classification in the FV Hierarchy
3) There are other instances where practical expedient is allowed. An entity is allowed to use a practical expedient in other circumstances such as in the valuation of benefit plans or for a private company’s measurement of share-based payments
