Fair Value Measurements

Question 1

US GAAP have standardized the definition of Fair Value, established a framework for measuring FV, and outlined required FV disclosures for all areas that require or permit FV measurement Except?

Answer 1

1. Share-based Compensation
2. Measurement based in OR using vendor-specific objective evidence of FV; AND
3. FV measurement used for Lease Classification or Measurement.

Question 2

Is FV an Exit Price or Entrance Price?

Answer 2

Exist Price

Question 3

Is FV a Market-based measure or an Entity-based measure?

Answer 3

Market-based

Question 4

Where does the FV measured? Principle Market or Most Advantageous Market?

Answer 4

FV is measured in Principle Market for Asset or Liability OR the Most Advantageous Market ifPrinciplee Market does not exist.

Question 5

A FV measure should reflect what assumptions?

Answer 5

An FV measure should reflect all assumptions that market participants use to price the asset or liability, including assumptions about risks.

Question 6

Does FV include Transaction Costs.

Answer 6

NO

Question 7

Does FV include Transportation Costs?

Answer 7

YES, it FV may include Transportation costs if Location is an attribute of the asset or liability.

Question 8

How FV or nonfinancial asset is assumed?

Answer 8

FV of nonfinancial asset assumes the HIGHEST and BEST use of asset.

Question 9

What should be included in the FV of Liability

Answer 9

The FV of liability should include the liability’s nonperformance risk, which is the risk that obligation will not be fulfilled.

Question 10

How FV of an entity instrument should be measured

Answer 10

FV of an entity instrument should be measured from the perspective of a market participant who holds that instrument as an asset.

Question 11

What does the FV measurement assume for Liability and entity’s equity instrument?

Answer 11

FV measurement assumes that liability or an entity’s equity instrument is transferred to a market participant at the measuring date and assumes that the liability or equity instrument would remain outstanding and would not be settled, concealed, or extinguished on the measurement date.

Question 12

What is Orderly Transaction?

Answer 12

An orderly transaction cannot be a FORCED TRANSACTION.

Question 13

What is requirement for Market Participants?

Answer 13

Market participants are buyers and sellers who are independent NOT related parties. They should be acting in their economic best interest.

Question 14

What is Principle Market

Answer 14

A market with the greatest volume OR level of activity for the asset or liability AND reporting entity must have access to the Principle Market at the Measurement Date.

Question 15

There exist Principle Market (PM) and Most Advantageous Market (MAM). The price in MAM is $100 and $98 in PM. What will be the FV?

Answer 15

It will be $98. If there exist both PM and MAM, you have to go with PM.

Question 16

What is the role of transaction price

Answer 16

We use the transaction cost to calculate the amount to determine the Most Advantageous Market but Transaction cost is NOT included in the final Fair Value Measurement.

Question 17

What are Valuation Techniques for measuring the FV?

Answer 17

There are three Valuation techniques:

1. Market Approach (Prices and Other relevant info from marketplace (Exchange).
2. Income Approach (PVFCF), (DCF)
3. Cost Approach (Replacement Cost)

Question 18

What is a Hierarchy of Inputs?

Answer 18

The FV hierarchy “PRIORITIZE” the inputs that can be used in the valuation techniques. Level 1 inputs have the highest priority, and level 3 has the lowest priority.

Question 19

What are Level 1 Inputs?

Answer 19

Quoted prices in ACTIVE MARKET for IDENTICAL assets or liabilities

Question 20

What are Level 2 Inputs?

Answer 20

1. Quoted prices for SIMILIAR assets or liabilities in ACTIVE MARKET.
2. Quoted prices for IDENTICAL or SIMILIAR ASSETS in NON-Active MARKET.
3. Quoted prices for IDENTICAL (with Adjustment) or SIMILIAR LIABILITIES when traded as ASSETS.
4. Inputs other than Quoted Prices that are observable for Assets or Liabilities.
5. Inputs that are derived from or Corroborated by Observable Market Data.

Question 21

What are Level 3 Inputs?

Answer 21

These are Unobservable inputs for Assets or Liability e.g. Future Cash Flow. These should be used only if there are no observable Level 1 or Level 2 OR when undue COSTS and EFFORT are required to obtain observable inputs.

Question 22

Should Quantitative Information about significant “Unobservable Inputs”

Answer 22

YES

Question 23

Should Discussion of sensitivity of Level 3 measurement to changes in Unobservable Inputs be disclosed

Answer 23

YES

Question 24

Should the Description of the entity’s Valuation Process be disclosed

Answer 24

YES

Question 25

Should the Transfers between Level 1 and 2 of the FV Hierarchy be disclosed?

Answer 25

YES

Question 26

Should information for nonfinancial assets and liabilities for which measurement differ from highest and best use.

Answer 26

YES, if the measurements differ from highest and best use of nonfinancial assets and liabilities, information about this should be disclosed

Question 27

Should the Hierarchy for items that are not measured on the balance sheet but are disclosed in the notes to financial statements be disclosed?

Answer 27

YES

Question 28

What are Exceptions to FV Measurement?

Answer 28

1. it is not practical to measure FV
2. FV cannot be reasonably determined; OR
3. FV cannot be measured with sufficient realiability