Far 3 Flashcards Preview

FAR > Far 3 > Flashcards

Flashcards in Far 3 Deck (20):
1

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

A.
Replacement cost.

B.
Current market value.

C.
Historical cost.

D.
Net realizable value.

Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.

2

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
A. Consistency.
B. Cost-benefit.
C. Relevance.
D. Representational faithfulness.

Cost-benefit is the only constraint among the four answer alternatives. When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.

Damn right it is.

3

In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for

Transaction Cost Transportation Cost
Yes Yes
Yes No
No Yes
No No

No Yes

In determining the fair value of an asset in the most advantageous market, the market based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.

4

Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, "Fair Value Measurement"?

A. Provide a uniform definition of "fair value" for GAAP purposes.
B. Provide a framework for determining fair value for GAAP purposes.
C. Establish new measurement requirements for financial instruments.
D. Establish expanded disclosures about fair value when it is used.

C. Establish new measurement requirements for financial instruments

Establishing new measurement requirements for financial instruments, or for any other asset or liability, is not one of the purposes of the fair value framework. Measurement requirements or elections are determined by other pronouncements; the "Fair Value Measurement" pronouncement establishes standards to be followed in determining (measuring) fair value when it is used.

5

A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows
Quoted price of asset Transaction costs
Market A $1,000 $ 75
Market B 1,050 150
What is the fair value of the financial asset?

A. $ 900
B. $ 925
C. $1,000
D. $1,050

The fair value of the financial asset is $1,000, the quoted price in the most advantageous market, but without adjusting that price for transaction costs. Since there is no principal market for the financial asset, the most advantageous market must be used to determine fair value. The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs. Thus, the most advantageous market is Market A, determined as:
Market A Market B
Quoted price of asset $1,000 $1,050
Transaction cost ( 75) ( 150)
Net Proceeds $ 925 $ 900
Even though transaction costs are considered in determining the most advantageous market, the price in the most advantageous (or principal) market used to measure the fair value of the asset (or liability) is not adjusted for transaction costs [ASC 820-10-35-9B]. Therefore, the quoted price of the asset in the most advantage market, unadjusted for the transaction costs, is fair value.

6

Which of the following statements concerning the determination of fair value is/are correct?

I. The determination of fair value is based on a hypothetical transaction.
II. The determination of fair value is based on an exit price.
III. The determination of fair value of a nonfinancial asset should be based on the intended use of the asset by the reporting entity.

C. I and II only.
Both Statements I and II are correct. The determination of fair value is based on a hypothetical transaction and on the use of a (hypothetical) exit price. Statement III is not correct. The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants, not based on the intended use by the reporting entity.

7

Which of the following levels of the fair value hierarchy is the highest and which is the lowest in terms of desirability for use in determining fair value?

Highest Level Lowest Level
Level 3 Level 1
Level 1 Level 4
Level 1 Level 3
Level 4 Level 1

In the fair value hierarchy, level 1 is the highest or most desirable level, and level 3 is the lowest or least desirable level

Level 1 Level 3

8

Which of the following statements concerning inputs used in ascertaining fair value is/are correct?

I. Only observable inputs can be used.

II. Inputs that incorporate the entity's assumptions may be used.

Why, both is wrong :
While inputs used in determining fair value do not have to be observable inputs (Statement I), an entity's assumptions may be used in determining fair value (Statement II).

Why 2 is correct:
An entity's assumptions may be used as inputs in determining fair value. Those assumptions would be level 3, unobservable inputs, but would be used when adequate observable inputs were not available to make fair value determinations.

9

Observable inputs, other than quoted prices in active markets for identical items, would constitute what level in the fair value hierarchy?

B. Level 2

Level 2 inputs are observable for assets or liabilities, either directly or indirectly, other than quoted prices in level 1. For example, quoted prices for similar items in an active market would be level 2 inputs.

10

Inputs to the valuation techniques used to determine (measure) fair value may include inputs that are:

Observable Unobservable
No No
No Yes
Yes No
Yes Yes

Inputs (assumptions, data, etc.) used to determine fair value may be either observable (e.g., market data) or unobservable (e.g., probability assumptions).

11

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

A.
Discounted cash flow of Favre's operations.

B.
Quoted market prices available from a business broker for a similar asset.

C.
Quoted market prices on a stock exchange for an identical asset.

D.
Historical performance and return on Driver's investment in Favre.

Quoted market prices on a stock exchange for identical assets would be level 1 inputs, the highest level in the hierarchy of inputs for valuation purposes, and the most reliable evidence of fair value.

12

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?

I. Quoted market prices should be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued.

II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.

Neither Statement I nor Statement II is correct. Quoted market prices should not be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued (Statement I). A "blockage factor" occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a "blockage factor" would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value. Additionally, quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value (Statement II). Such prices would be considered level 2 factors, observable inputs but not in active markets.

13

The fair value for an asset or liability is measured as
A. The appraised value of the asset or liability.
B. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants

By definition, the fair value for an asset or liability is measured as the price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants; that is, fair value is measured as an exit price.

14


The determination of fair value may be for:

A Standalone Asset or Liability A Group of Assets or Liabilities
Yes Yes
Yes No
No Yes
No No

Yes Yes
While the determination of fair value is for a particular (identified) asset or liability, that asset or liability, in fact, may be either a standalone asset or liability (e.g., a financial instrument or an operating asset) or a group of assets or liabilities taken as a unit (e.g., an asset group or a line of business).

15

On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
A. $ 6,000
B. $10,000
C. $16,000
D. $18,000

Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.

16

For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, "Fair Value Measurement," not apply?

A. Accounts receivable.
B. Investments in debt securities to be held-to-maturity.
C. Investments in equity securities held for trading.
D. Inventory reported at lower of cost or market.

Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, "Fair Value Measurement." The use of lower of cost or market valuation places upper ("ceiling") and lower ("floor") limits on the measurement of "market" that may not result in a true fair value measurement. Thus, the measurement of inventory at "market" is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.

17

ASC 820, "Fair Value Measurement,

Accounts receivable.
B. Investments in debt securities to be held-to-maturity.
C. Investments in equity securities held for trading

18

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.

19

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective investments held-to-maturity at fair value. Charlieco measures its investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report investment held-to-maturity at fair value?

C. Alphaco, Betaco, and Charlieco.

As the parent, Alphaco may elect to report all of the investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.

20

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.