Fair Value Framework—Introduction and Definitions Flashcards
Define “fair value” for accounting purposes. Describe the individual components of the fair value definition and how each component impacts the application of the definition. Demonstrate the application of the fair value definition to assets, liabilities, and shareholders’ equity and to a net portfolio of assets and liabilities. Explain when a practical expedient can be used to determine fair value.
What is Fair Value?
FV is 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,
- FV is the exit price.
- It can be the price in the future.
3, The FV should not be adjusted for transaction cost, but should be adjusted for the transportation cost! - Must be in the orderly transaction. Not under the forced transaction.
- FV is a market-based measurement, not an entity-specified measurement.
- FV should be the price in the principle market (greatest volume), OR most advantageous market (most sales proceeds) if principle market is not available.
How to report FV if it not avaiable?
ASC 820 allows to us Practical Expedient approach for investment.- The investee reports Net asset value at fair value.
Application of FV
To Asset: Assumes the highest and best use of asset for non-financial assets, but not for financial assets.
To Liability: should include the liability’s nonperformance risk.
To equity: Apply to market participant who hold the instrument as asset.
Applicability
Not apply to:
- Share-based payment transaction.
- Inventory pricing.
- Vendor-specific objective evidence.
- Lease classification
- Investment
How to report the FV of asset if have different markets and principle market is not available?
First, find the most advantageous market by looking at the higher sales proceeds ( proceeds are the amount that seller receives after all costs and expenses are deducted.)
Second, find out the sales price.
valuation technique of FV
- Market approach-use the price and other information from the market.
- Income approach- Compute the PV of future cash flow or discounted future cash flows.
- Cost approach-Use the current replacement cost.
Level 1—Inputs in this, the highest level, are unadjusted quoted prices in active markets for identical assets or liabilities (or equity items).
Quoted prices should not be adjusted because the entity holds a sizable position in the asset or liability relative to the trading volume in the market (often referred to as the “blockage factor”).
