Flashcards in Fair Value Framework Deck (18):
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Determination of fair value of a nonfinancial asset, the highest and best use of the asset may be determined as occurring through?
The highest and best use of a nonfinancial asset to market participants may occur either principally through its use with other assets or principally on the price that would be received to sell (exchange) the asset.
The determination of fair value may be for:
A standalone asset or liability; or a group of assets or liabilities.
What is the intent of the framework for the use of fair value in GAAP?
It is intended to achieve both increased consistency and increased comparability in fair value measurement and reporting.
How should you report an investment using the fair value option?
You should recognize your share of cash dividends received during the period and the increases in the fair value of the investment.
The determination of fair value is:
based on a hypothetical transaction and on the use of a (hypothetical) exit price.
Describe the income approach for determining fair value for GAAP purposes.
This approach converts future amounts to a single present amount.
Describe the cost approach for determining fair value for GAAP purposes.
This approach uses the amount currently required to replace the service capacity of an asset.
Describe the market approach for determining fair value for GAAP purposes.
This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.
What are the three valuation techniques that should be used in determining fair value for GAAP purposes?
Market approach, income approach, and cost approach.
Can amortized cost and fair value be used to measure and report investments classified as held to maturity?
What is the appropriate basis for determining the fair value of an asset or a liability?
The appropriate basis for determining the fair value of an asset or a liability is an exit price.
What date must a company elect to implement the fair value option?
If a company intends to elect to implement the fair value option for its investment, it must make its election on the date it first recognizes the investment.
What purpose does the fair value hierarchy serve?
To prioritize the inputs to valuation techniques used to measure fair value.
Which level of the fair value hierarchy, if any, requires the greatest amount of disclosures?
Level 3 is the lowest level in the fair value hierarchy. It consists of unobservable inputs and requires the greatest amount of disclosures.
What significant fair value disclosures are required only in annual statements?
The methods an significant assumptions used to estimate fair value.
What are the special disclosures required for fair value measurements that are based on unobservable inputs?
1. reconciliation of beginning and ending balances.
2. description of the valuation process used
3. Quantitative information about the unobservable inputs used.
4. Narrative description of the sensitivity of fair value to changes in unobservable inputs.
5. Unrealized gains/losses for the period and where reported.