FAR 4

Question 1

Accrual accounts:

Answer 1

Economic event (service provided or received) -> Accrual acc’t (AR or AP) -> Cash (received or paid)

Question 2

Deferral accounts:

Answer 2

Cash activity (received or paid) -> Deferral acc’t (Unearned revenue or prepaid expense) -> Event (service performed or service used)

Question 3

FV measurement exclusions:

Answer 3

1. Share based payment transactions (common stock)
2. Inventory (i.e. lower of cost or mkt)
3. Investments in a sub that is to be consolidated
4. Pension plans
5. Lease contracts (FV option election disallowed)

Question 4

Determination of FV

Answer 4

1. Based on hypothetical transaction (“orderly transaction”) at the measurement date under current mkt conditions
2. Based on an EXIT price (not forced liquidation or distressed sale)
3. For nonfinancial assets, should be based on the intended use of the asset by mkt participants

Question 5

FV of a FINANCIAL asset when no principal market (greatest volume and activity for the item):

Answer 5

Determine most advantageous market (max. selling price, min. transfer price)
Selling prince in advantageous market is the fair value price (do not subtract transaction cost; do subtract transportation cost)

Question 6

When to follow “Fair Value Measurement”

Answer 6

1. When required by GAAP

2. When elected by a firm

Question 7

Difference between U.S. GAAP and IFRS when measuring and disclosing FV

Answer 7

None

Question 8

Are exit prices conceptually different than entry prices?

Answer 8

Yes. May also be different at date of initial recognition (related party, seller in duress-bankruptcy, unit of account/measure is different than basis for FV determination, market is different than market for FV determination).
When transaction price (entry) is different than FV (exit), gain/loss is recognized in income.