Fair Value Framework- Introduction and Definitions

Question 1

Define “fair value” (for accounting purposes).

Answer 1

The 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

Question 2

For purposes of the fair value definition, what are the assumed characteristics of market participants?

Answer 2

Buyers and sellers that are:
•Independent of the reporting entity.
•Acting in their economic best interest.
•Knowledgeable of the asset or liability and the transaction involved.
•Able and willing, but not compelled, to transact for the asset or liability.

Question 3

What are the major purposes intended to be accomplished by the fair value framework?

Answer 3

To provide a framework for the use of fair value in generally accepted accounting principles (GAAP) so as to:
•Achieve increased consistency and comparability in fair value measurements; and
•Expand disclosure when fair value measurements are used.