Recognition and Measurement of Fair Value

Question 1

What are the three approaches to measuring Fair Market Value?

Answer 1

Market Approach (uses market transactions to determine the Fair Value)

Income Approach (discounts future cash flows)

Cost Approach (uses current replacement costs)

Question 2

If you elect to use Fair Value, how is it booked?

Answer 2

Debit or Credit the instrument and debit or credit an unrealized gain or loss which goes to the income statement! (NOT OCI)

Question 3

T/F: You can divide a financial instrument into parts that you want to measure at FV?

Answer 3

False: You have cannot break apart one instrument but you can elect different instruments to be measured at FV if you choose.