FAR - Fair Value Framework Flashcards
Define: Fair Value
FV = the price that would be received to sell an asset OR paid to transfer a liability in an orderly transaction between market participants at measurement date
What are the key components of Fair Value?
- FV is a market-based measurement, NOT entity specific
- FV focuses on HOW to measure not WHEN to measure
- FV determination may be stand-alone OR a group (A or L)
- FV transaction is a hypothetical one at measurement date
- FV occurs in a Principal Market OR Most Advantageous Market
Identify the difference between: Principal Market vs Most Advantageous Market
Principal Market = provides the greatest volume and level of activity for the asset and liability within which reporting entity could sell or transfer the asset or liability, respectively.
Most Advantageous Market = reporting entity could sell asset at a price that maximizes the amount received for asset OR minimizes the amount paid to transfer a liability
When are transaction and transportation costs taken into account in market determination?
Both are included in determining the MOST advantageous market; however, transaction costs are EXCLUDED in determining the Fair Value of the asset or liability
What are the ASSUMED characteristics of all market participants?
Buyers and sellers are:
- Independent of the reporting entity - not related parties
- Acting in their economic best interest
- Knowledgeable of the asset or liability and the transaction involved
- Able and willing, but not compelled, to transact
What is the Practical Expedient Exception?
Allows a company to use to measure the Fair Value of an Investment that does not have a quoted market price but reports a Net Asset Value (NAV). Investments often referred to as Alternative Investments.
The use of fair value measurement of a nonfinancial asset is based on its highest and best use by the reporting entity.
True or False
FALSE
The determination assumes the highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different
Fair Value is based on Entry Price?
True of False
FALSE
Fair Value is based on EXIT PRICE
Define: Market Approach
Uses prices OR other relevant information generated by market transactions of IDENTICAL or SIMILAR assets or liabilities
Define: Income Approach
Converts future amounts to a single present value or amount - i.e., Discounting for Future Cash Flows
Define: Cost Approach
Uses amount that currently would be required to REPLACE the service capacity of an asset.
Define: Entry Price
The price paid to acquire an asset OR the price received to assume a liability
Define: Exit Price
Ther price that would be received to sell an asset OR paid to transfer a liability
What are the dates when an entity can elect to use Fair Value Option?
- When the item is first recognized
- When a firm commitment occurs
- When an asset previously reported at FV w/unrealized gains/losses in earnings no longer qualifies for FV treatment
- When accounting treatment for an investment change because it becomes subject to the equity method or is ineligible for consolidation.
- When an item is measured at FV at the time of an event but does not require FV measurement subsequent to the reporting dates.
When is an entry price is not equal to the exit price?
- Transaction occurs between related parties
- Transaction occurs when seller is under duress
- Unit of account included in transaction price is different from the unit used to measure at FV
- Market in which transaction price occurred is different from the market unit would be sold or transferred
