FAR 3 Flashcards
Substance over form
the economic substance of a transaction over the way the transaction is presented
Fair value framework purpose…
- Provide a uniform definition of “fair value”
- Provide a framework for determining fair value
- Establish expanded disclosures about fair value when it’s used
(consistency and comparability)
(standards that must be used when determining fair value)
Fair value as an asset of liability is measured as…
the price RECEIVED WHEN SELLING AN ASSET OR PAID WHEN TRANSFERRING A LIABILITY in an orderly transaction between market participants (think in terms of EXIT PRICE, adjusted for transportation cost);
the current market value
To determine the fair value of a nonfinancial asset, consider…
- what is physically possible
- what is financially feasible
- what is legally permissible
T or F. Parent companies can report the fair value of investments held by subsidiaries in their consolidated statements.
False, the FV of the investments will be eliminated in consolidation. The parent will report the sub’s investments at the sub’s carrying value in the consolidated statements. The parent will record the investment at FV on the parent’s books only.
Approaches for determining fair value…
- Income approach - convert future income to present (fair) value
- Cost approach - replacement cost of a working asset adjusted for obsolescence
- Market approach - price of identical/comparable item
How does a firm report the amount of change that results from changing the valuation approach to fair value?
As a change in accounting estimate.
Net realizable value
An exit price;
NRV = Selling price - cost to complete and sell
Historical cost
An entry price;
Original acquisition cost + associated costs
Replacement cost
The amount that would have to be paid if the same assets (or equivalent) were currently acquired;
Used in lower-of-cost-or-market inventory valuation procedure;
An entry price
Periodicity
Assumption that financial info must be available periodically, not only at the end of an entity’s existence
Monetary unit
Assumption that home-country currency is stable and used as the basis in the FS’s; implies unit of currency is stable
Economic (separate) entity
Assumption that the corporation is the reporting entity, not the owners; S/H’s are separate from the entity; corporation is a separate legal entity
Conservatism
Under conditions of uncertainty:
- suppresses positive information
- requires reporting negative information when outcome is likely
Entry values
- Replacement costs
2. Historical costs
