FARE 10 Fair value

Question 1

Fair Value

Answer 1

• Exit price.
• The price received to sell an asset or paid to transfer a liability
• market based measure
• measured in the principal market
• doesn’t include transaction costs (only for advantages market calc)
• includes transportation costs
• FV of nonfinancial asset assumes the highest and best use of the asset

Question 2

Orderly transaction

Answer 2

• not forced transaction (not liquidation etc)

Question 3

Principal market

Answer 3

with the greatest volume or level of activity for the asset of liability

Question 4

most advantageous market

Answer 4

the best price for the asset or liability after considering transaction costs, which are not included in the final fair value measurement

Question 5

Valuation techniques

Answer 5

1. Market approach = FV
2. Income approach = PV
3. Cost approach = current replacement cost

Question 6

Hierarchy of inputs

Answer 6

1. Level 1 Inputs = identical
2. Level 2 Inputs = similar
3. Level 3 Inputs = discounted cash flow
   If there are multiple levels, then pick the weakest link