Fair Value Measurement Flashcards
What is Fair Value?
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.
What does fair value measurement focus on?
How to measure fair value not when to measure fair value.
How is the determination of fair value?
The determination of fair value for a particular asset or liability (or equity item) may be either a stand-alone asset or liability (e.g., a financial instrument or a nonfinancial operating asset) or a group of assets/liabilities (e.g., a reporting unit or business). Fair value determination should consider the attributes (e.g., condition, location, restriction on asset use or sale, etc.) of the specific asset or liability being measured.
What is the most advantageous market?
one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability.
How are transaction costs treated?
The price determined in the principal or most advantageous market should not be adjusted for transaction costs—the incremental direct cost to sell the asset or transfer the liability—which do not measure a characteristic of the asset or liability.
How is transportation costs treated?
The cost incurred to transport the asset or liability to its principal or most advantageous market (the location characteristic of an asset) would be used to adjust fair value for measurement purposes.
How would the determination of a NON-financial Asset?
The highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different; the concept of highest and best use does not apply to measuring the fair value of financial assets (or liabilities).
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?
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. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
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?
$81
When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. 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).
How is debt investment classified as held to maturity
An entity may elect to measure and report a debt investment classified as held-to-maturity at fair value. Traditionally, debt investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity.
