chapter 8

what is the relationship between fair value and present value?

-a codification topic may require the use of fair value, and a researcher may determine that an income approach, using present value, is an appropriate method for measuring fair value. -in other words, in certain cases, present value can be used as a method for measuring fair value.

identify two assets or liabilities for which the fair value option may be elected

-a written loan commitment -firm commitment

explain the difference between step 1 and step 2 of the PP&E impairment test, for assets held and used.

step 1: determine whether the asset's carrying value exceeds the sum of the undiscounted cash flows expected to result from the entity's own use and eventual disposal of the asset. -if the carrying value exceeds entity's internal cash flow projections, go to step 2 step 2: measure an impairment loss for the amount by which the asset's carrying amount exceeds its fair value.

most debt securities are not quoted on public exchanges. so, how might a financial statement preparer go about valuing a debt security?

-debt securities are frequently traded through brokers, and recent pricing data for these trades can be used as an observable input to determine the price of the same, or similar, debt securities. think of valuing debt like obtaining market comps for your home's value, where you would adjust up or down if the comparable homes have more or fewer bathrooms. -if recent trade data for a similar debt security are available, adjustments may be required to reflect differences in the specific securities (e.g., adjustments for differences between the issuers' credit standing, or adjustments for the trading volume of different securities.) -therefore, valuing debt can involve consideration or multiple inputs, given that quoted prices may not be readily available

what are four major topical areas covered in section 35 of the fair value measurement topic (ASC 820-10)?

-definition of fair value -valuation techniques -inputs to valuation techniques -fair value hierarchy

name one example of a financial asset and one example of a financial liability, and describe how these items meet the definition of financial asset or financial liability.

-financial assets definition: cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following: --receive cash or another financial instrument from a second entity (or) --exchange other financial instruments on potentially favorable terms with the second entity -financial assets examples: --accounts receivable (a contract that conveys "the right to receive cash") --instruments in equity securities (shares of stock) -financial liabilities definition: a contract that imposes on one entity an obligation to do either of the following: --deliver cash or another financial instrument to a second entity (or) --exchange other financial instruments on potentially unfavorable terms with the second entity -financial liability examples: --accounts or notes payable --derivative liabilities, such as an out-of-the-money forward contract to buy shares of IBM

what is the fair value hierarchy used for? what information (or, specifically, what characteristic) about a measurement does the hierarchy attempt to convey to financial statement users?

-given that fair value measurements can vary in their degree of observability, ASC 820 introduced a fair value hierarchy, which prioritizes the use of observable inputs. for each asset or liability measured at fair value, companies must disclose the hierarchy level of the measurement. -the fair value hierarchy is as follows: level 1: measurement is observable, price is quoted by market level 2: measurement is mostly observable (e.g., a quoted price is available for similar assets or liabilities) level 3: measurement relies heavily on unobservable inputs (such as management assumptions)

identify two ways that changes in fair value might be recorded. for example, if an asset is debited to reflect an increase in its fair value, what are two possible ways the credit might be recorded?

-in the income statement (fair value through earnings) -in other comprehensive income (fair value through OCI)

describe three sources of guidance a researcher might consult, when he or she comes across an individual topic requiring the use of fair value.

-individual topic requiring use of fair value -ASC 820: measurement and required disclosures -interpretive guidance from nonauthoritative sources (if helpful)

identify the three valuation techniques available for measuring fair value, and briefly describe each.

-market approach: where the valuation is based on market prices for identical or similar assets or liabilities -cost approach: where the valuation is based on the current replacement cost of an asset, as determined from a hypothetical market participant's perspective -income approach: which uses valuation techniques (such as present value) that converts future cash flow amounts (or future income and expenses) into a single current amount.

differentiate between recurring and nonrecurring fair value measurements. name two examples of each

-recurring fair value measurements of assets or liabilities are those that are required or permitted each reporting period. --example: adjustments in equity securities and derivative valuations -nonrecurring fair value measurements of assets or liabilities are those that are required or permitted only in particular circumstances --example: inventory obsolescence and disposal/exit costs

name two alternative techniques for measuring present value. which techniques generally applies when cash flows are fixed or contractual in amount?

-the discount rate adjustment technique (generally applies when cash flows are fixed or contractual in amount) -the expected present value technique

what's a key concept described within section 30 of the fair value measurement topic? explain.

emphasizes that transaction prices generally reflect fair value, at initial measurement, except in specified circumstances and provides examples of such circumstances.

where would a researcher find guidance regarding the fair value option?

guidance is included within a separate codification topic: ASC 825 (financial instruments)

what is meant by the term observable inputs?

observable inputs are inputs that are developed using market data and that reflect market participant assumptions.

where, within the fair value measurement topic, would a researcher find present value guidance?

particularly when using present value as a method of measuring fair value, researchers should consult ASC 820-10, section 55 (implementation guidance), in addition to considering guidance from the individual topic requiring the use of present value