FAR 1.04 - FAIR VALUE OPTION ACCOUNTING Flashcards
FAR 1.04 - FAIR VALUE OPTION ACCOUNTING
A company leases trucks and properly classifies the leases as capital leases. The leases have a 10-year term, and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions?
Recognize the change to fair value accounting with an unrealized loss in the income statement
Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income
Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings
Leases are not eligible for the fair value option
Leases are not eligible for the fair value option
EXPLANATION:
ASC 825-10-15-5(d) specifically excludes leases from eligibility for the fair value option.
FAR 1.04 - FAIR VALUE OPTION ACCOUNTING
Which of the following is not a valuation technique used to measure or estimate fair value?
Income approach.
Cost approach.
Market approach.
Asset creation approach.
Asset creation approach.
EXPLANATION:
There are 3 approaches to measure fair value (MIC), the Market approach, Income approach and the Cost approach.
The asset creation approach isn’t a valuation technique used to measure fair value.
FAR 1.04 - FAIR VALUE OPTION ACCOUNTING
.
Which of the following phrases best describes a Level 1 input for measuring the fair value of an asset or liability?
Inputs that are principally derived from or corroborated by observable market data.
Inputs for the asset or liability based on the reporting entity’s internal data.
Unadjusted quoted prices for identical assets or liabilities in active markets.
Quoted prices for similar assets or liabilities in active markets
Unadjusted quoted prices for identical assets or liabilities in active markets.
EXPLANATION:
When reporting items at fair value, an entity is required to disclose the level of inputs used to measure fair value with
level 1 being the most reliable and level 3 being the least.
Level 1 consists of unadjusted quoted market prices for identical assets or liabilities in active markets.
Quoted prices for similar assets or liabilities in active markets and inputs that are principally derived from or corroborated by observable market data would be level 2 inputs.
Inputs based on the reporting entity’s internal data are level 3 inputs.
FAR 1.04 - FAIR VALUE OPTION ACCOUNTING
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, the sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?
$80
$82
$81
$76
$81
EXPLANATION:
When no principal market exists for a financial asset, the measurement of its fair value is based on transaction would occur in the most advantageous market for the asset.
The most advantageous market maximizes the amount that would be received to sell the asset, net of transaction costs.
That means the second market is the most advantageous because it results in net sales proceeds of $80, as opposed to $76 in the first market.
Even though transaction costs are considered when determining the most advantageous market, after the most advantageous market has been determined, the asset’s fair value is measured with transaction costs ignored.
Therefore, the financial asset will be measured at a fair value of $81, reflecting
the gross sales proceeds from market, the second market.
FAR 1.04 - FAIR VALUE OPTION ACCOUNTING
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the
asset. Which of the following terms best describes this fair value measurement approach?
Income
Market
Cost
Observable inputs
Income
EXPLANATION:
The income approach for measuring fair values involves evaluating the future benefit that will be derived from the asset and determining the appropriate amount of investment that would be justified to obtain such a return.
A common application of this approach is to measure the present value of expected future positive cash flows.
