FAR 1.04 - Fair Value Accounting

Question 1

What items are recognized at Fair Value?

Answer 1

1. Trading Securites
2. Available-for-Sale Securites
3. Business Combinations (assets acquired and liabilites assumes) initially
4. Impairment losses
5. Derivatives

Question 2

What is FMV of marketable securites?

Answer 2

It’s market value

Question 3

Wht is the FMV of inventory?

Answer 3

It’s replacement cost, subject to floow and ceiling limitations.

Question 4

What is the FMV of cash?

Answer 4

It’s face value

Question 4

Define market approach

Answer 4

Use of market transactions that involve identical or comparable Assets or liabilities

Question 5

Name and describe the two different “uses” for FMV items

Answer 5

1. “In exchange-some itens are more valueable in exchange and are mesured at what would be received upon selling the item.
2. “In use”-some items are more valuable in use and are measured at potential revenues earned and costs saved resulting from their use.

Question 5

Describe Expected Cash flow approach.

Answer 5

Uses weighted averages of different possibilites.

Example-Cash flow has a 10% chance of being $100, 60% chance of $200, 30% chance of $300

Expected -$220 (10% x $100 + 60% x $200 + 30% x $300)

Question 7

How is Fair Market Value determined for many items?

Answer 7

In what use would be “it’s highest and best use”.

Question 9

What are the two cash flow approach methods?

Answer 9

Traditional and Expected approach.

Question 10

Define Cost approach

Answer 10

Measuring the cost that would be incurred to replace the benefit derived from an asset.

Question 11

Waht is the FMV of A/R?

Answer 11

It’s Net Realizable Value

Question 12

What is the 6 step prcedure to determine FMV of an item.

Answer 12

1. Identify asset
2. Determine most advantageous market(highest and best use)
3. Determine the valuation premise (in-use or in-exchange)
4. Determine ther appropriate valuation technique.(market, income or cost approach.
5. Obtain inputs for valuation (levels 1, 2 or 3.)
6. Calculate FMV of asset.

Question 13

Describe the traditional cash flow approach

Answer 13

Most likely used cash flow amounts

Example-Cash flow has a 10% chance of being $100, 60% chance of $200, 30% chance of $300

Traditional approach recognizes $200 (since it is the most likely)

Question 14

Define Income approach.

Answer 14

Analyzing future amounts in the form of revenues. cost savings, earnings or some other item

Question 14

Name and define the 3 levels of inputs

Answer 14

1. Level 1-using data from actual market transaction occuring in an active market for identical assets or liabilities
2. Using observable data:
   
   1. on transaction not occuring in an active market, or
   2. transactions are similar, but not identical assets or liablitites
3. Using largely unobservable data and largely based on personal judgement.