F2 - Fair Value Measurements Flashcards
How is nonfinancial assets measure in fair value?
at the highest possible given
Level 1 input to valuation(more realiable)
Quoted price in an active market for the indentical asset or liability
Level 2 input to valuation techniques
- quoted market prices that are observable/unobservable
- applying FV on similar asset values(mkt)
- identriacal or similar
Level 3 input valuation technique
unobservable inputs for the asset or liability
A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets:
Market
Quoted Price
A -$20,000
B-25,000
C-30,000
D-35,000
What is the fair value of the financial asset?
Because there is no principal market, and the asset is actively traded in all four markets, the fair value will come from the market with the most advantageous price. In this case, Market D’s value of $35,000 is the most advantageous.
What is fair value
- price to sell an asse or transfer liability
- as a measurement date
- excludes transaction costs
Principal market is:
- greates volume
Most advantegour market is:
- best price
- trasancation are included in this narket
- Note: Quoted price - transaction costs then after choose which ones has more(but report the quoted price for an answer)
Level 1 inputs example:
- Stock: traded on large exhanges which contain uoted price in active mkts for indetntical securieted
- you can easily find it (google it)
Level 2 input example:
- Municipal bonds:included inputs outtide of those from quoted mkt prices
**Bonds do not contain quoted prices in active mkts for idnectial secutires
Level 3 example:
- no public information for this hard to google it you have to do your own hw
- complex derivatieves: management assumption
3 diff fair value approcahes:
- Mkt approach
- income approach
- cost approach
Mkt appraoch examples:
Level 1 (identical or comparible assets) new york stock excachange
Income appraoch example
convert future amounts (discounted cash flow model)
we do our own research
Cost approach example
Replacement cost
what is gonna cost if we lost it today?
Debt Security is:
Issues debt secutiy to raise money
Purchase debt secutiry as investment (earn interest income / principal get back at the end)
Trading security is:
- want to sell / buy very quickly short term
- measurement in FV
- Reporting Gain/Loss in I/S
- Cash flow stmt - operating
Available for sale security is:
- Held but not until matuirty
- Measurement in FV
- Reporting Gain/Loss - OCI
- Cash flow stmt - Investing
Held to maturity isL
- hold to maturity date
- Measurement in amortized cost
- Reporting Gain/Loss - n/a -footnote disclosure
- Cash flow stmt - Investing
JE for Trading Security and solving a problem:
Example: Purch 40K convertivle debt. YR1 FV 60K and sold yr2 65K:
Step 1: FV (YR1) - purch fv= unrealized gain/loss
60K-40K=20K unrealized
now if its year to year without selling then we use FVyr2-FVyr1 to get i
DR - Trading Security 20K
CR - Unrealized Gain(I/S) 20K
Step 2:
Proceed form sale - FV (12/31) = realized gain / loss
65K-60K-= 5K realized gain
DR - Cash 65K
CR - Debt Trading Sec 60K
CR- Realized gain 5K
JE for Available for sale Security and solving a problem:
Example: Purch 60K convertivle debt. YR1 FV 50K and sold yr2 65K:
Step1: FV YR1 -Purch FV = unrealized gain/loss
DR- Unrealized Loss (OCI)
CR - Valuation Allowance
Step 2: Proceed for sale - Purch FV = realized G/L
65K-60K = 5K
DR-Cash 65K
DR-Valuation Allowance 10K
CR- Unrealized loss (OCI) 10K
CR-AFS Debt Sec 60K
CR - Realized Gain 5K
reverse valuation /unrealized back whenever we SELL
Cnvering Trading Securities (changes) to another security:
- AFS/HTM - Unrealized Gain/Loss hits Income Stmt
AFS converting to these impacts what:
- Trading - Unrealized G/Los hits Income Stmt
- HTM - hits OCI
HTM converitng impacts if chosse another security is:
- Trading -unrealized g/l income stmt
- AFS - hits OCI
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Current Expected Credit Loss (CECL)
- considers histocial event/current conditons/future expectations to see if impairment exist
Current Expected Credit Loss (CECL) steps: (step3/4 for AFS)
- Calculate PV of futrue cash folows(annuanl interest/principal) or face value multiply pv of $1 factor
- Determine credit loss if any(PV of future cash flows - amoritized cost = (+) go to step 4 / (-) extpected credit loss go into step 3
- Determine loss and limit of credit loss (FV- ammortize cost) (+) Gain
- Determine impact of **Loss OCI **
Total loss -credit loss = loss to OCI
Current Expected Credit Loss (CECL) steps: for HTM regarding bonds:
- Calculate PV of face value at maturity= face value multiply pv of $1 factor
- Calculate PV interest payments by Multiplyin Face value X rate given then subtract any ($ that was getting discounted for pmt) then multiply PV of ordinary due
- Calculate PV total by adding the PV of face value at maturity and PV of interest payments
- Determine credit loss by subtracting the Amoritze cost and PV total
CECL JE for AFS:
DR Credit loss (step 2)
DR unrealized loss -afs(OCI)(step 4)
CR allowance for credit losses
CR valuation allowances AFS
CECL JE for HTM remeber this one doesnt calculate step 3 only skips to step 4:
STEP2 . PV -ammortized cost =credit loss
step 4 . total loss -credit loss =0 so no effect on OCI
DR - Credit Loss
CR allowance for credit loss
Unrelaized Holding gain/loss in income statement is the same as……
Trading securities FV diferences between years.
