Flashcards in Recognition And Measurement Deck (15):
What is an exit price?
The price that would be received to sell an asset or paid to transfer a liability
Conceptually, an entry price and exit price are different
In what situations can the entry (transaction) price and exit (Fair Value)price be different?
1.) the transaction is between related parties
2.) the transaction takes place under duress
3.) the unit of account for the transaction is different than the unit of account that are used to measure asset or liability at fair value.
4.) the market in which the transaction price takes place is different from the principal market (or most advantageous market)
What is an entry price?
Amount paid to acquire an asset or received to assume a liability
It is the price paid when an asset or liability is initially recognized, which may or may not be fair value
What action does the entity take if it is required to measure an asset at fair value but the transaction price at initial recognition differs?
A gain or loss is recognized in earnings at initial recognition of the asset or liability. The asset would be recorded at fair value, the difference between the transaction (entry) price and recorded fair value (exit) price would be the gain.
What 3 approaches/Techniques can be used in the determination of fair value for GAAP purposes?
1.) Market Approach - Uses prices and other relevant information generated by market transactions that are identical or comparable to the items being valued.
2.) Income Approach - Converts future amounts to a single present amount. Discounting future cash flows would be an example.
3.) Cost Approach - Uses the amount that currently would be required to replace the service capacity of the asset, adjusting for obsolescence.
How to pick valuation techniques/approach selection?
Depends on the circumstance, including the availability of sufficient data for each respective approach.
In some cases, a single valuation technique will be appropriate, and in some cases multiple valuation techniques will be appropriate (i.e. when valuing an entire business).If more than one method is used, the results must be evaluated and weighted.
What alternative approaches can be used for Fair Value determination?
1.) SIngle approach to determining FV can be used. i.e., Quoted market prices in active markets
2.) Multiple approaches to determining fair value may be appropriate. I.e., Valuing an entire business. Professional judgement required is assessing multiple outcomes.
In which situations can an entity elect to measure at Fair Value? (What kind of assets)
1.) Recognized financial assets and liabilities
2.) Firm commitments not otherwise recognized and that involve only financial instruments
3.) Written loan commitments
4.) Rights/obligations under warranties and insurance contracts that can be settled by paying a third party
What items are not available to measure at Fair Value?
1.) Investments in entities to be consolidated
2.) Obligations or assets related to pension or other employee-oriented plans
3.) Lease-related financial assets or liabilities
4.) Demand deposits of financial institutions
5.) Instruments that are components of shareholders' equity
When can Fair Value option be elected?
1.) When the item is first recognized
2.) When an eligible firm commitment occurs
3.) When the accounting treatment of an investment in another entity changes
What are the Fair Value Option application requirements?
May be applied on an instrument by instrument basis (With certain exceptions)
Does not have to be applied to all instruments issued or acquired in a single transaction
Just be applied to an entire instrument, not just to specific elements of an instrument
Is the Fair Value option Irrevocable?
Yes, cannot revoke except when a new election date for a specific item occurs.
How are Held-to-Maturity investment securities treated if Fair Value is applied?
Treated like investment securities held-for-trading.
What are the steps to take in accounting for a Fair Value election?
1.) Determine Carrying Value
2.) Determine Fair Value
3.) Determined difference between CV and FV
4.) Recognize difference as: Write up or down, recognize increase (gain) or decrease (loss) in current income