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?