Fair Value Measurements

Question 1

Fair Value

Answer 1

Defined as the price that would be received if you sell an asset in an active market

Question 2

Assumptions Fair Value

Answer 2

Transaction takes place in the most advantageous market available to the entity that maximizes the selling price

Buyer/Seller are willing and able to do business, and are each acting in their own best interest

Not compelled to enter the transaction- they both act independently

Question 3

Highest and best use considers what is:

Answer 3

Physically possible
Legally permissible
Financially feasible

Question 4

Approaches for determining fair value

Answer 4

Market approach
Income approach
Cost approach

Question 5

Market approach

Answer 5

Prices generated by real market transactions for identical or similar items

Question 6

Income approach

Answer 6

Discounts future amounts to current value

Question 7

Cost approach

Answer 7

Uses current amount required to replace the service value of an existing asset

Question 8

Fair value option is not available for

Answer 8

Investments in entities that will be consolidated

Obligations of assets related to pension or other employee-oriented plans

Lease-related financial assets or liabilities

Demand deposits of financial institutions

Instruments that are components of shareholders’ equity

Question 9

Fair value can be elected only when:

Answer 9

The item is first recognized (when the company acquired it)

When an eligible firm commitment occurs

When the accounting treatment of an investment in another entity changes

Question 10

Fair value can be applied on an instrument by instrument basis

Answer 10

Does not have to be applied to all instruments issued or acquired in a single transaction

Must be applied to an entire instrument- not just to specific elements of an instrument

Question 11

Fair value accounting at eligible election date

Answer 11

Determine carrying value (CV)
Determine fair value (FV)
Determine difference between CV and FV
Recognize difference as
   A write up or write down
   Recognize increase (gain) or decrease (loss) in 
   current income

Question 12

Fair value inputs

Answer 12

Observable and unobservable

Question 13

Observable inputs

Answer 13

Derived from market data independent of the entity- example is stock exchange which gives real-time market prices for stocks.

Question 14

Unobservable inputs

Answer 14

Value is based on the entity’s assumptions based on the best information they have (essentially their best guess)

Question 15

Level 1

Answer 15

Quoted market prices in an active market for identical items

Highest level and involves observable inputs, which are the most desirable

Example is stocks listed on a major exchange, you know at any second what the exact value is for one share, all shares are identical.

Question 16

Level 2

Answer 16

Observable inputs that don’t meet all requirements for level 1

Quoted prices in active markets for similar items

Quoted prices in markets that are not active

Example is comparing recently sold homes that are similar to your house to come up with a value.

Question 17

Level 3

Answer 17

Unobservable inputs for the item being valued

Lowest level with the least desirable inputs

Usually based on the reporting firm’s internal data

This basically means an entity’s best guess based on their own internal numbers

Question 18

Disclosure requirements

Answer 18

You must disclose the fair value at the reporting date

You must disclose the transfers in and out of level 3 assets and liabilities

You must disclose the significant unobservable inputs used in the level 3 valuators

Disclose the amounts of unrealized gains and losses associated with the fair value changes for level 3 assets and liabilities

Question 19

GAAP vs IFRS differences- Statement of Cash Flows

Answer 19

GAAP: Dividends paid are in the financing section. Dividends received, and interest paid and received are all included in the operating section.

IFRS: Dividends and interest paid can be classified as either operating or financing activities. Dividends and interest received can be classified as either operating or investing activities.

Question 20

GAAP vs IFRS- Inventory

Answer 20

LIFO is not allowed at all under IFRS but is allowed by GAAP.

Write downs: If inventory value is written down, no reversals are allowed under GAAP, but a subsequent reversal is allowed under IFRS, but never above the original cost.

Measurement: For IFRS, inventory is the power of cost or NRV, with NRV being the selling price less completion costs. Under GAAP, inventory using LIFO or the retail inventory method is the lower of cost or market, otherwise it’s the lower of cost or NRV.

Question 21

GAAP vs IFRS- Equity Method

Answer 21

When an investment is between 20% to 50% ownership but the investor does NOT have significant influence.

GAAP: either the fair value method or the equity method can be used.

IFRS: the equity method must be used.

Question 22

PPE Carrying Value and Depreciation GAAP vs IFRS

Answer 22

Under GAAP, PPE is carried at historical cost less accumulated depreciation and any impairment losses

Under IFRS, the revaluation model is allowed as well as historical cost. The revaluation model is basically the fair value option for PPE: whenever there is a difference in the carrying amount and the fair value of any PPE, then the value is written up or down to whatever the fair value is. If the value is written up, then the increase goes to other comprehensive income. If the value is written down, it is recognized in income.

Investment property under IFRS can also be carried at historical cost or use its fair value, except that any gain or loss in value under the fair value is recognized in income instead of gains going through OCI like for PPE.

Remember that IFRS uses component depreciation, meaning that if major components of one piece of equipment has different useful lives, the similar components will be depreciated separately.

Question 23

Impairment of Assets: GAAP vs IFRS

Answer 23

IFRS: it’s a one step test that compares the carrying amount to the recoverable amount. The impairment loss would the difference in carrying amount and its recoverable amount. Also, under IFRS an impairment loss can be reversed. These same one step rule reversal of impairments apply to intangible assets.

GAAP: Two-step year for impairment. Step 1: is the carrying amount greater than the sum of future cash flows from the asset? Step 2: the impairment loss is equal to the difference between the carrying amount and the asset’s fair value. An impairment loss under GAAP can’t be reversed. Same rules for the tests and no reversal of impairment applies to intangible assets.

Question 24

Intangible Assets: GAAP vs IFRS

Answer 24

Intangible Assets are carried at cost less amortization under GAAP.

IFRS allows for either historical cost or revaluation model