W2 - Fair value

Question 1

What is the definition of “Fair Value”

Answer 1

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 2

What does Fair Value implies (4 thing)

Answer 2

An exit price rather than an entry price
Market-based rather than entity-specific (assume can be traded on the market)
Based on current market conditions
Not a forced sale or liquidation

Question 3

What’s the difference between entity-specific restrictions v. asset specific restrictions?

Answer 3

Asset-specific restrictions impacts fair value of the asset

Question 4

What is the main method to determine fair value asset price?

Answer 4

mark-to-market value, In actively traded markets a mid-market price is a reliable measure of fair value

You also use the principal market, ie market with the greatest volume and level of activity. If there is no principal market, use the most advantageous market – the market which maximises the amount received (asset)..or paid (liability)..taking into account transaction costs.

Question 5

What are the other method to determine fair value asset price?

Answer 5

‘mark-to-model’ approach

Market approach –> market information of similar assets/liabilities
Cost approach –> Reflects the amount that would be required currently to replace the service capacity of an asset
Income approach –> Converts future amounts to a single current amount

Question 6

How do you account for Impairment? (DR/CR)

Answer 6

DR Impairment loss (SoPL)
CR Asset

Question 7

What assets should be tested annually for impairment?

Answer 7

Intangible assets with indefinite life or not yet available for use
Goodwill arising on acquisition

Question 8

What is a cash-generating unit ? (CGU)

Answer 8

Smallest identifiable group of assets that generates cash flows which are largely independent of cash flows from other assets or groups of assets