Recognition and Measurement

Question 1

List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.

Answer 1

• An investment in a subsidiary or variable interest to be consolidated
• Employers’ and plans’ obligations for pension benefits, other postretirement benefits, postemployment benefits
• Financial assets and liabilities under lease accounting
• Demand deposit liabilities of financial institutions
• Financial instruments classified by the issuer as a component of shareholders’ equity

Question 2

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

Answer 2

• Recognized financial assets or financial liabilities (some exceptions)
• Firm commitments
• Written loan commitments
• Rights and obligations under insurance contracts and warranties
• Other financial instruments embedded in nonfinancial derivative instruments

Question 3

Describe the income approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).

Answer 3

This approach converts future amounts to a single present amount.

Question 4

Define “entry price.”

Answer 4

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

Question 5

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

Answer 5

• When the item is first recognized
• When firm commitment occurs
• When financial, an asset previously reported at fair value with unrealized gain/loss in earnings no longer qualifies for that fair value treatment
• When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation
• 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

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

Answer 6

• The transaction is between related parties.
• The transaction occurs when the seller is under duress.
• 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.
• 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 7

Describe the market approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).

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

Describe the cost approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).

Answer 8

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

Question 9

What are the three valuation techniques (or approaches) that should be used in determining fair value for the purposes of generally accepted accounting principles?

Answer 9

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

Question 10

Define “exit price.”

Answer 10

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