Fair Value Measurements Flashcards
(10 cards)
Sleeth Co. has an investment in shares of a public company that are temporarily restricted and may not be transferred or sold for a period of 18 months. Unrestricted shares of the public company are actively traded on the New York Stock Exchange, and most analysts agree that the restriction would cause investors to discount the stock by 10%. The investment does not give Sleeth Co. control of the company or the ability to exercise significant influence over it. If Sleeth Co. reports this investment at fair value, which level of inputs will it use in the valuation?
A. Level 1.
B. Level 2.
C. Level 3.
D. This investment must be accounted for under the equity method and may not be reported at fair value.
B. Level 2.
Dumb question, but it is referring to similar assets not identical ones.
Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset?
A. Quoted prices in active markets for identical assets.
B. Quoted prices for similar assets in active markets.
C. Unobservable inputs for the asset.
D. Inputs other than quoted prices that are observable for the asset.
C. Unobservable inputs for the asset.
Level 3 inputs are described as unobservable inputs.
When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?
A. A portion of an asset or liability.
B. Instrument-by-instrument basis.
C. Type-by-type basis.
D. At the entity level.
B. Instrument-by-instrument basis.
Which of the following describes a principal market for establishing fair value of an asset?
A. The market that has the greatest volume and level of activity for the asset
B. Any broker or dealer market that buys or sells the asset
C. The most observable market in which the price of the asset is minimized
D. The market in which the amount received would be maximized
A. The market that has the greatest volume and level of activity for the asset
The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.
Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct?
I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.
A. Both I and II are correct.
B. I only.
C. II only.
D. Neither I nor II are correct.
A. Both I and II are correct.
Which of the following are observable inputs used for fair value measurements?
I. Bank prime rate.
II. Default rates on loans.
III. Financial forecasts.
A. I only.
B. I and II only.
C. I and III only.
D. I, II and III.
B. I and II only.
Financial forecasts would be unobservable inputs
For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, “Fair Value Measurement,” least likely to apply?
A. Determination of the fair value to be assigned to land acquired in a business combination
B. Determination of the fair value of a bond liability for applying the fair value option
C. Determination of the fair value of legal services received in exchange for an entity’s common stock
D. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred
C. Determination of the fair value of legal services received in exchange for an entity’s common stock
The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity’s common stock. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. Information regarding the investment is as follows:
Front market Side market
Investment selling price $52/share $50/share
Transaction costs $ 6/share $ 1/share
If Front market is the principal market for Marco’s investment, what amount should Marco report as the fair value of the investment?
A. $46/share
B. $49/share
C. $50/share
D. $52/share
D. $52/share
The question states that Front is the principal market.
A transaction price cannot represent the fair value of an asset or liability at initial recognition if the
A. Principal markets of the parties are similar.
B. Transaction is between independent parties.
C. Transaction price includes transaction costs.
D. Seller has the option to decline the transaction price.
C. Transaction price includes transaction costs.
Fair value (FV) measurement is a market-based valuation technique based on selling an asset or transferring a liability in an orderly transaction between market participants on a specific date. Market participants are buyers and sellers in the principal market or, if no principal market exists, the most advantageous market for the transaction (Choice A).
As participants in the principal or most advantageous market, buyers and sellers are:
Independent of each other and not related parties (Choice B)
Knowledgeable and have a reasonable understanding about the asset or liability
Able and willing to enter (ie, able to decline) a transaction for the asset or liability (Choice D)
For items reported at FV, the FASB encourages using a market-based valuation because this technique provides a more relevant measurement than other methods (eg, historical cost). The market-based valuation maximizes the sales proceeds received or minimizes the transfer price of a liability to reflect the most advantageous terms for a sale or transfer.
The value of the asset or liability is not dependent on transaction costs (eg, legal fees, agent commissions). These costs may vary based on the specific transaction in which an entity is engaged. Thus, transaction costs are not included in the determination of transaction price.
Which of the following is true for valuing an asset at fair value?
A. The price of the asset should be adjusted for transaction costs.
B. The fair value of the asset should be adjusted for costs to sell.
C. The fair value price is based upon an entry price to purchase the asset.
D. The price should be adjusted for transportation costs to transport the asset to its principal market.
D. The price should be adjusted for transportation costs to transport the asset to its principal market.
