FAIR VALUE Flashcards
FV HIERARCHY LEVEL 1
OBSERVABLE INFORMATION (DIRECT & UNADJUSTED) FOR IDENTICAL ASSETS. THE MARKET APPROACH IS AN APPLICABLE VALUATION TECHNIQUE
FV HIERARCHY LEVEL 2
OBSERVABLE INFORMATION FOR SIMILAR, COMPARALE ASSERS IN ACTIVE OR INACTIVE MARKETS
FV HIERARCHY LEVEL 3
UNOBSERVABLE INPUTS, NOT DERIVED FROM THE MARKET, AND USED WHEN EITHER THE MARKET DOESN’T EXIST OR THE MARKET IS ILLIQUID. HIGHLY SUBJECTIVE
FAIR VALUE
A REASONABLE PRICE THAT MARKET PARTICIPANTS EXPECT TO RECEIVE IN AN ORDERLY TRANSACTION AT THE MEASUREMENT DATE.
EXIT PRICE
BASIS FOR FV - PRICE I RECEIVE WHEN I SELL
3 VALUATION APPROACHES TO MEASURE FV
- MARKET APPROACH
- COST APPROACH
- INCOME APPROACH (USUALLY ASSOCIATED WITH LEVEL 3)
MARKET APPROACH
RELIES ON MARKETPLACE PRICES FOR COMPARABLE ASSETS OR LIABILITIES
COST APPROACH
THE COST APPROACH STARTS WITH THE COST TO REPLACE AN ASSET OR REPLACE THE SERVICE CAPACITY OF THE ASSET. THEN, IF APPLICABLE, ADJUSTMENTS ARE MADE TO THE REPLACEMENT AMOUNT TO ACCOUNT FOR DIFFERENCES BETWEEN THE REPLACEMENT ASSET AND THE ASSET BEING VALUED.
INCOME APPROACH
THE INCOME APPROACH CONVERTS EXPECTED CASH FLOWS OF THE ASSET OR LIABILITY TO A SINGLE NET PRESENT VALUE (DISCOUNTED) AMOUNT. THE KEY INPUTS INVOLVED ARE THE AMOUNT OF CASH FLOWS, THE TIMING OF CASH FLOWS AND THE DISCOUNT RATE APPROPRIATE FOR THE RISK.
TEST FOR IMPAIRMENT
IF THE CARRYING VALUE IS GREATER THAT THE UNDISCOUNTED FUTURE CASH FLOWS THEN THE ASSET IS IMPAIRED
MEASURE THE IMPAIRMENT
COMPARE THE CARRYING VALUE TO THE FAIR VALUE
DISCLOSURES FOR ASSETS AND LIABILITIES THAT ARE MEASURED AT FAIR VALUE
- VALUATION TECHNIQUES AND INPUTS USED
- REFERENCE TO THE LEVEL OF FV HEIRARCHY USED
- FOR LEVEL 3, IN ADDITION TO THE INPUTS, INCLUDE THE IMPACT ON EARNINGS FOR THE PERIOD, INCREASED PURCHASES AND SALES, AND ANY TRANSFERS IN OR OUT OF LEVEL 3.
FV OPTION DISCLOSURE OBJECTIVE
TO ENABLE USERS OF FINANCIAL STATEMENTS TO UNDERSTAND MANGEMENT’S REASONS FOR ELECTING OR PARTIALLY ELECTING THE FV OPTION
