Fair Value Framework - Intro and Definitions

Question 1

Fair Value Defined

Answer 1

1. The price that would be received to sell an asset or paid to transfer a liability (exit price)
2. in an orderly transaction between
3. market participants at the measurement date

Question 2

Entry price (buying) and Exit price (selling) are different

Answer 2

1. Different markets
2. Related party transactions
3. Distressed sale (bankrupt, fire sale)
4. Different unit of account

Question 3

Orderly Transaction

Answer 3

1. Occurs at the measurement date
2. Occurs under certain market conditions
3. Not a forced liquidation or distressed sale
4. Occurs in the principal (greatest volume & level of activity) or most advantageous market (max selling price or minimum transfer price)

Question 4

Determination of Fair Value

Answer 4

Once the principal or advantageous market is identified, the fair value from that market:

1. Should not be adjusted for transaction cost
2. Should be adjusted for transportation cost to market

Question 5

Market Participant

Answer 5

Buyers or sellers that are:

1. Independent of the reporting entity
2. Acting in their economic best interest
3. Knowledgeable of the item or transaction
4. Able and willing to enter a transaction, but not compelled to do so

Question 6

Highest and Best Use

Answer 6

Considers what is:

1. Physically possible
2. Legally permissible
3. Financially feasible