Recognition and Measurement

Question 1

Fair Value Determination

Answer 1

When an asset is acquired or a liability is assumed in a transaction, the price paid to acquire the asset or the price received is assumed as a liability’s entry price. The price paid when an asset in initially recognized may or may not equal fair value.

FV of an asset or a liability is the price that would be received to sell an asset or paid to transfer a liability which is an exit price.

Question 2

An entry price and exit price predict FV

Answer 2

The entry price ( transaction price) and the exit price ( FV) will be the same at the date of initial recognition of an asset or liability. Both constitute the FV of the asset or liability at that date.

Question 3

An entry price and exit price do not predict FV

Answer 3

The entry price ( transaction price) may not be the exit price ( FV), so both cannot determine fair value

Question 4

Gain or Loss Recognition

Answer 4

If an entity is initially required or permitted to measure an asset or liability at fair value and the transaction price at recognition differs from FV, a gain or loss is recognized in earnings

Question 5

FV Measurement Techniques

Answer 5

Valuation techniques /Approaches -

1) Market Approach
2) Income Approach
3) Cost Approach

Question 6

Market Approach

Answer 6

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

Question 7

Income Approach

Answer 7

This approach converts future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value

Question 8

Cost approach

Answer 8

This approach uses the amount that currently would be required to replace the service capacity of an asset ( i.e., replacement cost), adjusting for obsolescence.

Question 9

Valuation Technique/ Approach Selection

Answer 9

Single Valuation Technique - (simple quoted prices in an active market for identical assets or liabilities)

Multiple Valuation Techniques - ( when valuing an entire business) it requires professional judgement to review range of alternative values.

All Valuation Techniques - the valuation must take into account appropriate risk adjustments including a risk premium for uncertainly.

Question 10

Consistent Application of Approach

Answer 10

1) Valuation techniques used to measure fair value should be consistently applied.
2) A change in valuation technique or its application is appropriate if the change will result in a more representative fair value due to improved techniques and/or changes in accounting estimates.

Question 11

Fair Value Option

Answer 11

An entity can apply the fair value option to an eligible item only on the date when one the following occurs:

1) When the item is first recognized
2) When an eligible firm commitment is established
3) Specialized accounting for an item ceases to exist

4) An investment becomes subject to equity method
accounting ( but is not consolidated) or to a VIE that is
no longer consolidated
5) An event that requires the item to be measured at FV
such as a business combination or significant
modification to debt instruments.

Question 12

Electing the fair value option for financial assets and liabilities

Answer 12

1) fair value option may be applied on an instrument by instrument basis with limited exceptions:
a) The FV option may be elected for a single eligible item without electing it for other identical items with the following exceptions:

1) I multiple advances are made to one borrower as part of a single contract and the individual advances lose their identify, FV option must be applied to all advances under the contract.
2) If the fair value option is applied to an investment that would otherwise be accounted for under the equity method of accounting , it must be applied to all the investor’s financial interests, both equity and debt, in that entity; or
3) If the FV option is applied to an eligible insurance/reinsurance contract, it must be applied to all claims/ obligations and features/coverages under the contract

Question 13

FV option exceptions regarding eligible insurance/reinsurance contract

Answer 13

The FV option may be applied to some of the individual instruments issued or acquired in a single transaction, but individual instruments are not issued or acquired in these types of transactions.

Question 14

Fair value option is irrevocable

Answer 14

FV Option is irrevocable unless and until a new election date for the specific item occurs

Question 15

FV option application

Answer 15

FV Option applies to entire instrument, specific cash flows, or portions of an instrument

Question 16

FV option elected for held to maturity securities

Answer 16

1) those securities will be treated and report as trading securities.
2) gains and losses resulting from change in fair value will not be reported in other OCI
3) Gains and losses resulting from changes in fair value will be reported in current income

Question 17

Instruments not eligible for FV option

Answer 17

1) Entities may not use fair value to measure and report the following financial assets and financial liabilities:
a) An investment in a subsidiary that is to be consolidated
b) An interest in a variable interest entity that is to be consolidated
c) Employers’ and plans’ obligations ( or assets) for pension benefits , other postretirement benefits , post-employment benefits, and other employee-oriented plans.
d) Financial assets and liabilities recognized under lease accounting
e) Demand deposit liabilities of financial institutions
f) Financial instruments that are classified by the issuer as a component of shareholders’ equity.