Introduction to Financial Valuation

Question 1

Identify ways in which professional judgment must be used in carrying out a valuation.

Answer 1

Professional judgment is used in valuation to develop n understanding of the purpose and context of a valuation, the selection of appropriate quantitative techniques and date, and ultimately, the assignment of a value.

Question 2

Identify and briefly describe the three approaches to determining fair value as specified by United States Generally Accepted Accounting Principles (GAAP).

Answer 2

1. Market approach: Information generated by market transactions for identical or similar items.
2. Income approach: Converts future amounts of benefit or sacrifice to determine current value.
3. Cost approach: Determines the amount required to acquire or construct a comparable item.

Question 3

Identify and briefly describe the three component levels of the United States Generally Accepted Accounting Principles (GAAP) hierarchy of inputs used for determining fair value.

Answer 3

Level 1: Quoted prices in active markets for identical items.
Level 2: Quoted prices in inactive markets or for items similar (but not identical) to those begin valued; observations inputs other than quoted prices relevant to the item being valued.
Level 3: Unobservable inputs relevant to valuing an item (e.g., assumptions, estimates, etc.).

Question 4

How is “fair value” defined and determined for United States Generally Accepted Accounting Principles (GAAP) purposes?

Answer 4

Fair value for United States Generally Accepted Accounting Principles (GAAP) purposes is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Question 5

What are some of the factors that must be considered in assigning value?

Answer 5

The following factors must be considered in assigning value:

1. The specific item or items (asset, liability, equity, etc.) being valued.
2. The condition of the item(s).
3. The location of the item(s).
4. The time at which the valuation is occurring.
5. The economic environment in which the valuation is occurring.