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Which Pronouncement provides guidance on how to measure fair value?

ASC 820


What are the objective of ASC820?

1.) Definition of Fair Value for GAAP Purposes
2.) Framework for measuring Fair Value
3.) A set of required disclosures about measurement


What is the definition of Fair Value?

Price to be received to sell an asset or paid to transfer a liability in an orderly transaction between two market participants


Is Fair Value a market-based measurement or an entity specific measurement?

Market based measurement


What type of "Transaction" should be used in determining Fair Value

A hypothetical transaction at the measurement date that would occur under current market conditions, it is not a transaction that would occur in a forced liquidation or distress sale.


Does there have to be a market to do a hypothetical sale when determining Fair Value?

No, even when there is no observable market to provide a price at the measurement date, a fair value measurement assumes that a transaction takes place at that date.


What market should the hypothetical transaction be assumed to occur when determining Fair Value?

It is assumed to occur in the principal market or, alternatively, in the absence of a principal market, the most advantageous market for the asset or liability, to which the entity has access, after taking into account transaction costs and transportation costs.


What is a principal market?

The market with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.


What is the most advantageous market? (In place of principal market if there is none)

The market in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset that minimizes the amount that would be paid to transfer the liability.


What costs should be included and not included in the FV price determined by the principal or most advantageous market?

Should be:
Transportation Cost - Cost incurred to transport the asset or liability to its principal or most advantageous market

Should not be:
Transaction Costs - Incremental Direct costs to sell the asset or transfer the liability, which do not measure a characteristic of the asset or liability.


"Market Participants" in a hypothetical transaction are assumed to be?

1.) Independent of the reporting entity
2.) Acting in their best economic interest
3.) Knowledgeable of the asset or liability and the transaction involved
4.) Able and willing, but not compelled, to transact for the asset or liability


How does the Fair Value definition fit on Non-Financial Assets?

Assumes the highest and best use of the asset by Market Participants, even if the intended use of the asset by the reporting entity is different.


How does Highest and Best use apply to Non-Financial Assets?

Highest and Best Use Considers what is:
Physically Possible
Legally Permissable
Financially feasible at the measurement date

Highest and Best Use may be:
In-use: Maximum value of an asset would occur through it's use in combination with other assets
In-exchange: Maximum value would occur principally on a stand-alone basis. (The price you would get for the aset in a sale) Usually Financial assets


How does the Fair Value definition apply to Liabilities?

Assumes the liability is transferred to a market participant at the measurement date, it is not cancelled or settled.
Liability continues, but as an obligation of another party. Nonperformance risk is assumed unchanged after the transfer. Adjustment should not be made for transfer restrictions


How does the Fair Value definition apply to Shareholder's equity

Fair Value applies. The measurement is from the perspective of the market participant that holds the instrument as an asset.

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