Fair Value Measurement Flashcards
What is the accounting standard for Fair Value Measurement?
IFRS 13
What is the definition of fair value as per the accounting standard?
Fair value 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
How is the fair value for non financial assets ascertained?
Highest and best use
What two markets must be considered when valuing inventories?
- the principal market
- the most advantageous market
What are the levels of the fair value hierarchy?
Level 1 - quoted prices
Level 2 - adjusted quoted price
(observable inputs)
Level 3 - unobservable inputs based on best information available (unobservable inputs)
Which costs are included or excluded in the exit price?
- does not include transaction costs
- includes transportation costs if appropriate
Which three uses should an entity consider?
- Physically possible
- Legally permissible (planning permission does not make it not permissible)
- Financially feasible
Explain Level 1 in the Fair Value Hierarchy
Inputs are adjusted quoted prices in active markets. This provides the most reliable evidence of fair value
Explain Level 2 in the Fair Value Hierarchy
Inputs are inputs other than quoted prices in level 1 are observable for that asset or liability
Explain Level 3 in the Fair Value Hierarchy
Inputs are unobservable inputs, based on the best information available
E.g debt
Give three examples of non financial assets
- PPE
- Intangibles
- Investment Property
Explain the principal market
Use in the first instance.
It is the market with the greatest volume of sales is (regardless of whether the company currently participates)
Explain the principal market
Use in the first instance.
It is the market with the greatest volume of sales is (regardless of whether the company currently participates) NOT NECESSARILY HIGHEST PRICE
Explain the most advantageous market
The highest price (after all costs)
In absence in the principal market.
In what order do you pick the market and price?
You pick the price AFTER market
What costs are ignored?
Transaction costs
What is fair value focussed on?
Assumptions of the market place and is not entity specific. It takes into account any amount assumptions of Risk.
What does fair value take into account?
Conditions and location of asset and restrictions on sale or use
Does the entity have to be transacting in a market to use the fair value?
No
Give n example of when you would use Level 3 Hierarchy
When the open market value is available and so the discounted cashflow is acceptable
With a farmer, would you include or exclude the notional rent and why?
Include as it is comparable to farmers who rent land.
What does fair value specifically exclude?
IFRS 2 share based payments
What does a fair value measurement of a non-financial asset take into account?
A market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant who would use the asset in its highest and best use
How will the maximum value of a non financial asset arise?
From its use in combination with assets or by itself
What is an example of if land was legally prohibited?
Land is protected in some way by law and a change or law is required
When assessing if something is legally permissible, what would market participants take into account?
Probability, extent and timing
What is the presumed highest and best use of an asset?
Its current use
What should be considered when concluding an asset’s highest and best use?
Alternative scenarios where market participants may use the asset differently
