F2 - Fair Value Measurements

Question 1

How is nonfinancial assets measure in fair value?

Answer 1

at the highest possible given

Question 2

Level 1 input to valuation(more realiable)

Answer 2

Quoted price in an active market for the indentical asset or liability

Question 3

Level 2 input to valuation techniques

Answer 3

• quoted market prices that are observable/unobservable
• applying FV on similar asset values(mkt)
• identriacal or similar

Question 4

Level 3 input valuation technique

Answer 4

unobservable inputs for the asset or liability

Question 5

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?

Answer 5

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.

Question 6

What is fair value

Answer 6

• price to sell an asse or transfer liability
• as a measurement date
• excludes transaction costs

Question 7

Principal market is:

Answer 7

• greates volume

Question 8

Most advantegour market is:

Answer 8

• 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)

Question 9

Level 1 inputs example:

Answer 9

• Stock: traded on large exhanges which contain uoted price in active mkts for indetntical securieted
• you can easily find it (google it)

Question 10

Level 2 input example:

Answer 10

• Municipal bonds:included inputs outtide of those from quoted mkt prices

**Bonds do not contain quoted prices in active mkts for idnectial secutires

Question 11

Level 3 example:

Answer 11

• no public information for this hard to google it you have to do your own hw
• complex derivatieves: management assumption

Question 12

3 diff fair value approcahes:

Answer 12

1. Mkt approach
2. income approach
3. cost approach

Question 13

Mkt appraoch examples:

Answer 13

Level 1 (identical or comparible assets) new york stock excachange

Question 14

Income appraoch example

Answer 14

convert future amounts (discounted cash flow model)
we do our own research

Question 15

Cost approach example

Answer 15

Replacement cost
what is gonna cost if we lost it today?

Question 16

Debt Security is:

Answer 16

Issues debt secutiy to raise money

Purchase debt secutiry as investment (earn interest income / principal get back at the end)

Question 17

Trading security is:

Answer 17

• want to sell / buy very quickly short term
• measurement in FV
• Reporting Gain/Loss in I/S
• Cash flow stmt - operating

Question 18

Available for sale security is:

Answer 18

• Held but not until matuirty
• Measurement in FV
• Reporting Gain/Loss - OCI
• Cash flow stmt - Investing

Question 19

Held to maturity isL

Answer 19

• hold to maturity date
• Measurement in amortized cost
• Reporting Gain/Loss - n/a -footnote disclosure
• Cash flow stmt - Investing

Question 20

JE for Trading Security and solving a problem:

Answer 20

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

Question 21

JE for Available for sale Security and solving a problem:

Answer 21

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

Question 22

Cnvering Trading Securities (changes) to another security:

Answer 22

• AFS/HTM - Unrealized Gain/Loss hits Income Stmt

Question 23

AFS converting to these impacts what:

Answer 23

• Trading - Unrealized G/Los hits Income Stmt
• HTM - hits OCI

Question 24

HTM converitng impacts if chosse another security is:

Answer 24

• Trading -unrealized g/l income stmt
• AFS - hits OCI

Question 25

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Current Expected Credit Loss (CECL)

Answer 25

• considers histocial event/current conditons/future expectations to see if impairment exist

Question 26

Current Expected Credit Loss (CECL) steps: (step3/4 for AFS)

Answer 26

1. Calculate PV of futrue cash folows(annuanl interest/principal) or face value multiply pv of $1 factor
2. Determine credit loss if any(PV of future cash flows - amoritized cost = (+) go to step 4 / (-) extpected credit loss go into step 3
3. Determine loss and limit of credit loss (FV- ammortize cost) (+) Gain
4. Determine impact of **Loss OCI **
   Total loss -credit loss = loss to OCI

Question 27

Current Expected Credit Loss (CECL) steps: for HTM regarding bonds:

Answer 27

1. Calculate PV of face value at maturity= face value multiply pv of $1 factor
2. Calculate PV interest payments by Multiplyin Face value X rate given then subtract any ($ that was getting discounted for pmt) then multiply PV of ordinary due
3. Calculate PV total by adding the PV of face value at maturity and PV of interest payments
4. Determine credit loss by subtracting the Amoritze cost and PV total

Question 28

CECL JE for AFS:

Answer 28

DR Credit loss (step 2)
DR unrealized loss -afs(OCI)(step 4)
CR allowance for credit losses
CR valuation allowances AFS

Question 29

CECL JE for HTM remeber this one doesnt calculate step 3 only skips to step 4:

Answer 29

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

Question 30

Unrelaized Holding gain/loss in income statement is the same as……

Answer 30

Trading securities FV diferences between years.