part 1.fair value applied to stockholders equity Flashcards
fair value requirements
apply to shareholder equity items
fair value measurement
is from the perspective of market participant that holds the equity item as an asset
fair value is based
on an exit price.
fair value of a liability is based
on the amount that would be paid to transfer the liability
the requirements of ASC 280 (fair value)
does not apply to inventory
fair value is a
market based measurement
non-financial assets
stocks
financial assets
stocks
investment in equity investee 10,000
unrealized gain fv option 10,000
xxx
entry price and exit price
are conceptually different and might be different.
if the transaction price (entry price) is different than the fair value (exit price) a gain or loss is recognized in income.
entry price
amount paid to acquire an asset or received to assume a liability
exit price
amount received to sell an asset or paid to transfer a liability
reasons entry price and exit price are different
- transaction between related parties
- seller is under duress
- unit of account/meassure is different than basis for fair value determination
- market is different than market for fair value determination
possible techniques or approaches for fair value determination
- market approach: uses prices generated by real market transactions for identical or similar items.
- income approach: discounts future amounts to a current present value
- cost approach: uses current amount required to replace the service value of an existing asset.
what entities can elect to measure at fair value
. recognized financial assets and financial liabilities
. firm commitments not otherwise recognized & that involve only financial instruments
. written loan commitments
. rights/obligation under warranties and insurance contracts that can be settled by paying a 3rd. party.
items that can’t be measured at fair value
- investments in entities to be consolidated
- obligations or assets related to pension or other employee-oriented plans
- lease - related financial assets or liabilities
- demand deposits of financial institutions
- instruments that are components of shareholders equity
fair value option can be elected only
. when the item is first recognized
. when an eligible firm commitment occurs
. when the accounting treatment of an investment in another entity changes
fair value option application requirements
- fair value option may be applied on an instrument to instrument basis
- does not have to be applied to all instruments issued or acquired in a single transaction
- must be applied to an entire instrument not just to specific elements of an instrument
fair value option is irrevocable
except when a new election date for a specific item occurs
accounting at election date
. determine carrying value
. determine fair value
. determine the difference between cv and fv
. recognize difference as: write item up or down and recognize increase (gain) or decrease (loss in current income)
example:
cv: 100,000
fv: 110,000
difference 10,000
investment in equity 10,000
unrealized gain - fv option 10,000
accounting after the election
at each subsequent reporting date: - adjust item to new fair value - recognize difference as: write item up or down and recognize increase or decrease in current earnings example: assume an increase in fv of an asset
asset 10,000
unrealized gain - fv option 10,000
observable inputs:
derived from market data from sources independent of the reporting entity
inobservable inputs:
entity’s assumptions based on best information available in circumstances
fair value measurement inputs hierarchy
level 1: unadjusted quoted prices in active markets for identical items: (identical) . highest level . most reliable evidence of fv . should be used when available . liquidity discount - permitted . control premium - not permitted . blockage discount - not permitted
level 2: inputs observable, either directly or indirectly that do not meet all conditions of level 1 (similar)
. quoted prices in active markets for similar items
. quoted prices in markets that are not active
. observable inputs other than quoted market prices that are relevant to an item being valued
level 3: unobservable inputs for the item being valued:
. lowest level with least desirable inputs (unobservable)
. may use reporting firm’s internal data
. based on assumptions or inferences that market participants would take
what purpose does the fair value hierarchy serve?
to prioritize the inputs to valuation techniques used to measure fair value
disclosure requirements for fv
it depends on whether fv is used:
. on a regular basis: fv is determined and applied to an item period after period
. on a non-recurring basis: fv is determined and applied only when certain conditions or situations occur.
for both situations you must disclose the fv at reporting date, valuation techniques and inputs used in those techniques.
disclosures of fv when used on a regular basis
each major category of asset or liability measured at fv:
. level of the fv hierarchy
. transfers in or out of each level of hierarchy
. for measurements in level 3, a reconciliation of beg. and end balances showing:
- recognized gains and losses and whether reported in net income or other comprehensive income.
- purchases, sales, issuances and settlements
- transfers in/out of level 3
disclosures of fv when used on non-recurring basis
each major category of asset or liability measured at fv:
. reasons for fv measurement
. level of the fv hierarchy within each measurement
. for measurements in level 2 and 3 a description of any changes in techniques
. for level 3:
- the effect of the measurement on earnings r oci
- quantitative information about the unobservable inputs used
disclosures of fv option
. identify items to which the fv option is applied and reasons for electing the fv option
. information to enable users to understand how fv is applied for each item (methods and assumptions)
. the amount of gains and losses associated with the fv changes
