FAR 2 Module 6

Question 1

define fair value

Answer 1

the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date

Question 2

describe the valuation techniques that can be used to measure the fair value of an asset or liability

Answer 2

1) market approach - uses prices and other relevant info from market transactions involving identical or comparable assets or liabilities to measure FV
2) income approach - converts future amts, including cash flows or earnings, to a single discounted amt to measure FV of assets or liabilities
3) cost approach - uses current replacement cost to measure fair value of assets

Question 3

describe the hierarchy of fair value inputs. Which inputs have the highest priority?

Answer 3

Level 1 inputs: quoted prices in active markets for identical assets or liabilities
Level 2 inputs: inputs other than quoted market prices that are directly or indirectly observable for asset or liability
Level 3 inputs: unobservable inputs for the asset or liability that reflect the entities’ assumptions and are based on the best available info.

-level 1 has highest priority

Question 4

most advantageous market

Answer 4

the market with the best price for the asset (maximize selling price of asset) or liability (minimize payment to transfer liability) after considering transaction costs only if no principal market
-transaction costs not included in final fair value measurement

Question 5

fair value disclosures

Answer 5

-provide info to users of assets and liabilities measured at fair value, such as:
1) valuation techniques and inputs entity uses to arrive at its measures of fair value, including judgments and assumptions that entity makes
2) uncertainty in fair value measurements as of reporting date
3) how changes in fair value measurements affect the entity’s performance and cash flows

Question 6

exceptions to fair value measurements

Answer 6

entity is exempt from FV measurements when:

1) not practical to measure FV
2) FV cannot be reasonably estimated
3) FV cannot be measured without sufficient reliability

Question 7

items not subject to fair value measurement

Answer 7

1) share-based compensation
2) measurements based on or using vendor-specific objective evidence of fair value
3) fair value measurements for lease classification or measurement

Question 8

fair value measurement facts

Answer 8

1) measured for asset(s) or liability(s) or entity’s equity instrument
2) market-based measure, not entity- based measure
3) measured in principal market or most advantageous market when principal market not available
4) it is an exit price (price to sell asset or transfer liability) not entrance (price to acquire asset or assume liability)
5) should reflect assumptions of market participants in pricing an asset or liability, including risks
6) not include transaction costs, but potentially transportation costs if location an attribute of asset or liability
7) assumes highest and best use of asset
8) FV of liability include its nonperformance risk (will not be fulfilled)
9) equity instrument measured from perspective of market participant if hold as an asset
10) liability or equity instrument transferred at measurement date, remain outstanding, and not settled, canceled or extinguished on measurement date

Question 9

orderly transaction

Answer 9

-not a forced transaction
-asset or liability is exposed to market long enough for marketing activities to occur related to assets and liabilities

Question 10

market participants

Answer 10

-buyers and sellers who are independent
-knowledgeable about asset or liability
-considered to be acting in economic best interest

Question 11

principal market

Answer 11

-market with greatest volume or activity for asset or liability
-if a principal market, price in market will be fair value measurement even if there is a most advantageous price in another market
-entity must have access to principal market at measurement date