Module 6: Fair Value Measurement Flashcards
(19 cards)
What is Fair Value
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date. It is a market-based measure, not an entity-based measure.
*the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date under market conditions.
Fair Value: Instrument by instrument basis
measuring the fair value separately for each individual financial instrument (like each specific investment), rather than applying the same measurement to a group or type of instruments.
Transaction costs may be included in fair value if:
if location is an attribute of the asset or liability.
Market participants
buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.
The market approach
uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities to measure fair value
concept of highest and best use
fair value is determined based on the price at which an asset could theoretically be employed in its highest and best use, rather than the use in which the asset is currently employed.
How is land recorded on the balance sheet under U.S. GAAP?
Land is recorded at historical cost, not fair value, regardless of its intended use or market value changes.
Is goodwill reported at historical cost or fair value on the balance sheet?
Goodwill is reported at historical cost unless impaired. If impaired, it is written down to fair value and the loss is recognized
Why are transportation costs included in the calculation of fair value for assets like a vehicle fleet?
Transportation costs are included because they affect how much money you actually get when selling the asset. Since the price depends on where you sell it, you subtract these costs to find the fair value.
**Remember that fair value of an asset is the exit price and you might need to pay transportation costs to get rid of the asset
What is the principal market in fair value measurement?
The principal market is the market with the greatest volume or level of activity for the asset or liability. If it exists, fair value is based on the price in this market, even if another market offers a higher price.
Cash Basis: Revenue and Expense Recognition
When cash is received and when cash is paid
Accrual Basis: Revenue and Expense Recognition
Revenue: when Realized or realizable and earned
Expenses: When incurred/owed/benefit received
What does the cash basis balance sheet include:
Cash and equity
Modified cash basis balance sheet includes:
-Inventory
-Investments at fair value
-Fixed assets net of
accumulated depreciation
-Short term and long term
debt
-Accrued income taxes
Cash Basis Revenue to Accrual
+ Ending AR (+ because we earned right to the cash this year)
- Beginning AR (- because we earned the rights to the cash last year)
- Ending UR (- because we will earn the rights to the cash next year)
+ Beginning UR (+ because we will earn the rights to the cash this year)
Cash for Purchases to COGS
Cash paid for purchases
+Ending AP (+ b/c expenses were incurred this period)
- Beginning AP (- b/c expenses were incurred last period)
-Ending inventory (- because this inventory hasn’t been sold so we don’t add it to COGS)
+ Beginning Inventory (+ b/c is inventory available for sale this period)
Cash Paid for Operating Expenses to Accrual Operating Expenses
Cash Paid for Operating Expenses
+ Ending Accrued Liabilities (Expenses incurred this period)
- Beginning Accrued Liabilities (Expenses incurred last period)
- Ending Prepaid expenses (Expense won’t take place until next year)
+ Beginning Prepaid Expenses (Expense will take place this period)
How do income tax-basis financial statements recognize revenues and expenses compared to GAAP?
They recognize revenues and expenses when they are reported on the tax return, which may be in different periods than GAAP. Non-taxable revenues and non-deductible expenses are still included but adjusted to reconcile to taxable income.
**the nondeductible portion of expenses (such as meals and entertainment) should be included in the expense category in the determination of income.
What to do when calculating net income
