Fair Value Framework - Introduction and Definitions

Question 1

Which of the following statements is correct regarding fair value measurement?

A. Fair value is a market-based measurement.
B. Fair value is an entity-specific measurement.
C. Fair value measurement does not consider risk.
D. Fair value measurement does not consider restrictions.

Answer 1

Fair value is a market-based measurement.

Question 2

A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial assets in each of the four markets
Market     Quoted Price
   A                 $20,000    
   B                   25,000
   C                   30,000 
   D                   35,000

Answer 2

35,000

***In the absence of a principal market, the entity would use the most advantageous market to determine the fair value for an asset or liability.

Question 3

Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, “Fair Value Measurement”?

A. Provide a uniform definition of “fair value” for GAAP purposes.
B. Provide a framework for determining fair value for GAAP purposes.
C. Establish new measurement requirements for financial instruments.
D. Establish expanded disclosures about fair value when it is used.

Answer 3

Establish new measurement requirements for financial instruments.

Question 4

Which of the following is a benefit of the fair value framework with respect to fair value measurement and fair value reporting?

Answer 4

Increased Inconsistency: YES

Increased Comparability:
YES

Question 5

For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?

A. Determination of the fair value to be assigned to land acquired in a business combination
B. Determination of the fair value of a bond liability for applying the fair value option
C. Determination of the fair value of legal services received in exchange for an entity’s common stock
D. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred

Answer 5

Determination of the fair value of legal services received in exchange for an entity’s common stock

***The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity’s common stock.

Question 6

The determination of fair value may be for:

Answer 6

A stand alone asset or liability: YES;

A group of assets or liabilities: YES

Question 7

In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for

Answer 7

Transaction cost: NO;

Transportation cost: YES

Question 8

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which of the following?

A. What is physically possible
B. What is financially feasible
C. How the reporting entity would use the asset
D. What is legally permissible

Answer 8

How the reporting entity would use the asset

Question 9

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

Answer 9

$81

***The second market is more advantageous because it has the higher selling price ($80 vs. $76). In addition, fair value excludes, i.e., does not include, the deduction for transaction cost; therefore, the fair value of the asset is $81 ($80 selling price + $1 transaction fee = $81).