FAR-F2-M3-Fair Value Measurements Flashcards
Is the following statement true or false? Fair value is a market based measure, not an entity based measure.
True. Fair value is determined by the market, not by the entity.
Is the following statement true or false? Fair value includes transportation costs, but does not include transaction costs.
True. Fair value does not include transaction costs but may include transportation costs if location is an attribute to the asset or liability. Additionally, although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market.
Fair value for an asset or liability is measured as:
The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants and in the principal market at the measurement date under market conditions.
Is the following statement true or false? Fair value should use the price that would be received in the PRINCIPAL market first. If no principal market is available, then fair value is based on the most advantageous market available.
True. Fair value should use the price that would be received in the PRINCIPAL market first. If no principal market is available, then fair value is based on the most advantageous market available. The transaction costs are used to determine the most advantageous market, but are not included in the actual fair value.
A change from the cost approach to the market approach of measuring fair value is considered what type of accounting change?
A change from the cost approach to the market approach is considered a change in accounting estimate (prospective change). The change in the valuation technique used to measure fair value is a change in accounting estimate.
The fair value option applies to which type of assets and liabilities?
The fair value option applies to financial assets (e.g. debt and equity securities) and liabilities. Excluded from the fair value option are investments in subsidiaries, pension benefit assets/liabilities and assets and liabilities recognized under leases.
NONFINANCIAL ASSETS use the concept of Highest and Best Use.
How is the principal market determined?
The principal market is the market with the greatest volume of activity for the particular asset for which fair value is being determined.
What is the concept of the highest and best use?
The fair value measurement of a NONFINANCIAL ASSET takes into account the market participants ability to generate economic benefits by using the assets in its highest and best use or by selling it to a market participant that would use the asset in its highest and best use.
Does the highest and best use concept apply to financial assets or the fair value of liabilities?
The highest and best use concept is NOT RELEVANT when measuring the fair value of financial assets or the fair value of liabilities.
Is fair value an exit price or an entrance price?
Fair value is an exit price (the price to sell an asset or transfer a liability) not an entrance price (the price to acquire an asset or assume a liability)
What are fair value inputs and what is their level of effectiveness?
Inputs are assumptions that are used to determine fair value.
1. Observable inputs are derived from market data independent of the entity and are highly desired.
2. Unobservable inputs are the entity’s assumptions based on the best information they have (essentially their best guess)
What are the levels of the fair value hierarchy?
Level 1: These are the highest level and involves observable inputs
Quoted market prices in an ACTIVE MARKET for IDENTICAL ITEMS
Level 2:
Quoted prices in ACTIVE MARKET for SIMILAR ITEMS.
Quoted prices in NONACTIVE markets
Quoted prices in NONACTIVE markets for IDENTIAL ITEMS
Level 3: Unobservable inputs. Lowest level with the least desirable inputs
Usually based on the reporting firms internal data.
What are the disclosure requirements when fair value is used?
You must disclose the significant unobservable inputs used in level 3 valuations.
