Recognition and Measurement

Question 1

Describe the income approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 1

This approach converts future amounts to a single present amount.

Question 2

Define “exit price”.

Answer 2

The price that would be received to sell an asset or paid to transfer a liability.

Question 3

List the items that entities may elect to measure and report at fair value.

Answer 3

1. Recognized financial assets or financial liabilities, (some exceptions);
2. Firm commitments;
3. Written loan commitments;
4. Rights and obligations under insurance contracts and warranties;
5. Other financial instruments embedded in non-financial derivative instruments.

Question 4

What are the three valuation techniques (or approaches) that should be used in determining fair value for Generally Accepted Accounting Principles purposes?

Answer 4

1. Market approach;
2. Income approach;
3. Cost approach.

Question 5

List the dates when an entity may elect to use fair value option for an eligible item.

Answer 5

1. When item is first recognized;
2. When firm commitment occurs;
3. When financial, an asset previously reported at fair value with unrealized gain/loss in earnings, no longer qualifies for that fair value treatment;
4. When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation;
5. When an item is measured at fair value at the time of an event, but does not require fair value measurement at subsequent reporting dates.

Question 6

Define “entry price”.

Answer 6

The price paid to acquire an asset or the price received to assume a liability.

Question 7

Describe the market approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 7

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.

Question 8

List the situations where the entry price may not be the exit price.

Answer 8

1. The transaction is between related parties;
   T2. he transaction occurs when the seller is under duress;
2. The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value;
3. The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred.

Question 9

Describe the cost approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 9

This approach uses the amount currently required to replace the service capacity of an asset.

Question 10

Describe the cost approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

Answer 10

This approach uses the amount currently required to replace the service capacity of an asset.