part 1.fair value applied to stockholders equity

Question 1

fair value requirements

Answer 1

apply to shareholder equity items

Question 2

fair value measurement

Answer 2

is from the perspective of market participant that holds the equity item as an asset

Question 3

fair value is based

Answer 3

on an exit price.

Question 4

fair value of a liability is based

Answer 4

on the amount that would be paid to transfer the liability

Question 5

the requirements of ASC 280 (fair value)

Answer 5

does not apply to inventory

Question 6

fair value is a

Answer 6

market based measurement

Question 7

non-financial assets

Answer 7

stocks

Question 8

financial assets

Answer 8

stocks

Question 9

investment in equity investee 10,000

unrealized gain fv option 10,000

Answer 9

xxx

Question 10

entry price and exit price

Answer 10

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.

Question 11

entry price

Answer 11

amount paid to acquire an asset or received to assume a liability

Question 12

exit price

Answer 12

amount received to sell an asset or paid to transfer a liability

Question 13

reasons entry price and exit price are different

Answer 13

1. transaction between related parties
2. seller is under duress
3. unit of account/meassure is different than basis for fair value determination
4. market is different than market for fair value determination

Question 14

possible techniques or approaches for fair value determination

Answer 14

1. market approach: uses prices generated by real market transactions for identical or similar items.
2. income approach: discounts future amounts to a current present value
3. cost approach: uses current amount required to replace the service value of an existing asset.

Question 15

what entities can elect to measure at fair value

Answer 15

. 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.

Question 16

items that can’t be measured at fair value

Answer 16

• 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

Question 17

fair value option can be elected only

Answer 17

. when the item is first recognized
. when an eligible firm commitment occurs
. when the accounting treatment of an investment in another entity changes

Question 18

fair value option application requirements

Answer 18

• 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

Question 19

fair value option is irrevocable

Answer 19

except when a new election date for a specific item occurs

Question 20

accounting at election date

Answer 20

. 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

Question 21

accounting after the election

Answer 21

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

Question 22

observable inputs:

Answer 22

derived from market data from sources independent of the reporting entity

Question 23

inobservable inputs:

Answer 23

entity’s assumptions based on best information available in circumstances

Question 24

fair value measurement inputs hierarchy

Answer 24

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

Question 25

what purpose does the fair value hierarchy serve?

Answer 25

to prioritize the inputs to valuation techniques used to measure fair value

Question 26

disclosure requirements for fv

Answer 26

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.

Question 27

disclosures of fv when used on a regular basis

Answer 27

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

Question 28

disclosures of fv when used on non-recurring basis

Answer 28

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

Question 29

disclosures of fv option

Answer 29

. 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