Fair Value Measurements

Question 1

Define Fair Value

Answer 1

Exit price. It is the price that would be received to sell an asset or paid to transfer a liability. It is a market-based measure, NOT an entity based measure.

Question 2

Principal Market

Answer 2

The market with the greatest volume of activity. If there is a principal market, t will be the FV measurement, even if there is a more advantageous price in a different market.

Question 3

Most Advantageous Market

Answer 3

The market with the highest price after deducting transaction costs.

Question 4

Valuation techniques for Fair Value

Answer 4

Market Approach, Income Approach, Cost Approach

Question 5

Define Level 1 Hierarchy of Inputs

Answer 5

Quoted prices in active markets for identical assets or liabilities that the entity has access to on the measurement date. Most reliable measure.

Question 6

Define Level 2 Hierachy of Inputs

Answer 6

Similar. Inputs other than quoted market prices (Level 1) that are directly or indirectly observable for the asset or liability. Includes: Quoted prices for similar assets or liabilties in active markets, Quoted prices for indentical or similar assets in markets that are not active.

Question 7

Define Level 3 Hierarchy of Inputs

Answer 7

Discounted Cash flows. Unobservable inputs for the asset or liability. They reflect the entity’s assumptions and should be based on the best available info. Only used when Level 1 and 2 are not observable ro when undue cost and effort is required to obtain observable inputs.

Question 8

How to classify if multiple levels are used

Answer 8

the fair value is classified based upon the lowest level used