Chapter 8: Fair Value Measurements

That is, the ________ of ASC 820 is to define the fair value measurement attribute, and to provide guidance necessary to apply that definition Organization of ASC 820-10, Section 35 (Subsequent Measurement) _________Defines fair value and provides guidance for applying the definition, including: • Identifying the asset or liability • Market participants • The price • Application to - Nonfinancial assets - Liabilities and equity - Certain financial assets and liabilities _______Introduces the following valuation techniques: • Market approach • Income approach • Cost approach Refers readers to section 55 ("Implementation Guidance") for additional information about these approaches ___________States that entities should maximize the use of relevant observable inputs and minimize the use of unobservable inputs when determining an item's fair value. • Provides examples of valuation inputs __________Defines and provides examples of valuation inputs classified as follows in the fair value hierarchy: • Level 1 • Level 2 • Level 3

objective definition of fair value valuation techniques inputs to valuation techniques fair value hierachy

when you encounter a Codification topic that requires the use of fair value, you'll also need to consult _____________. Located under ____________, ASC 820 is the primary source for fair value measurement and disclosure guidance within the Codification

ASC 820 (Fair Value Measurement) Broad Transactions

The following two-step test is used to determine whether an impairment loss must be recognized for an asset classified as held and used. - if 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.

1. CV exceeds cash flow projections 2. impairment loss CV exceeds FV

The fair value option may be elected for certain financial instruments not required to be measured at fair value. This option allows entities to measure certain financial assets and liabilities at fair value on a recurring basis All entities may elect the fair value option for any of the following eligible items: a. A recognized financial asset and financial liability, except any listed in the following paragraph b. A ________ that would otherwise not be recognized at inception and that involves only financial instruments . . . c. A written ________ d. The rights and obligations under [certain] ________ . . . e. The rights and obligations under [certain] _________ . . . f. A host financial instrument resulting from the separation of an embedded nonfinancial derivative from a nonfinancial hybrid instrument

firm commitment loan commitment insurance contracts warrant[ies]

If PP&E is classified as _____: The cost basis shall be tested for recovery when events or changes in circumstances (i.e., ________) indicate that the carrying amount of the asset or asset group may not be recoverable. Triggering events might include, for example, a significant decrease in the market price for an asset or asset group, or current period operating losses related to operation of an asset or asset group. ■ If PP&E is classified as __________ For every period that an asset is considered "held for sale," entities must compare the asset (or asset group)'s current carrying value to its fair value less costs to sell.

held and used triggering events held for sale:

Long-lived assets (excluding those acquired in a business combination) are initially measured at ________ and are subsequently measured at _________________________

historical cost amortized cost (i.e., cost net of depreciation).

Changes in an asset or liability's value may be recorded: ■ In the _____ ("fair value through earnings"); ■ In _________ ("fair value through OCI"); or ■ In the case of certain ______ items, changes in fair value may be reported in earnings but largely offset by changes in the fair value of a related asset or liability.

income statement other comprehensive income hedged

These approaches can be used individually or in combination to approximate the fair value of an asset or liability. In applying these valuation techniques, entities should select measurements that reflect the following: ■ ___: Entities should focus on how potential buyers and sellers (market participants) would value their asset or liability. ■ ___: Entities should focus on the value they expect to receive or pay when they rid themselves of (i.e., exit) the asset or liability. ■ _____: Entities should assume that a hypothetical sale would occur between informed, willing market participants

Market participant perspective Exit price notion Orderly transaction assumption

_____________are inputs that are developed using market data and that reflect market participant assumptions. __________ are inputs for which market data are not available and that are developed using an entity's best understanding of the assumptions that market participants would use when pricing the asset or liability.

Observable inputs Unobservable inputs

________ fair value measurements of assets or liabilities are those that are required or permitted each reporting period. _________ fair value measurements of assets or liabilities are those that are required or permitted only in particular circumstances measured at fair value for ____________ only or because the fair value option has been elected. Fair value is measured using one or more of the following three valuation techniques: ■ A ___________, where the valuation is based on market prices for identical or similar assets or liabilities; ■ A____________, where the valuation is based on the current replacement cost of an asset, as determined from a hypothetical market participant's perspective; or ■ An ___________, which uses valuation techniques (such as present value) that convert future cash flow amounts (or future income and expenses) into a single current amount.

Recurring Nonrecurring disclosure purposes market approach cost approach income approach

Also included in ASC 825 (Financial Instruments) is a requirement that public companies must disclose their financial instruments at fair value, whether measured at fair value on the _____________ FASB has eliminated the requirement that companies must disclose valuation techniques for instruments reported at fair value for _______ There are generally two reasons for which a researcher might use a present value measurement: ■ First, a Codification topic may require the use of ______ Lease assets and liabilities, for example, are recorded at the present value of remaining lease payments. ■ Or second, a Codification topic may require the use of fair value, and a researcher may determine that an ____________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.

balance sheet or not. disclosure only. present value. income approach, using present value,

Unlike other measurement attributes in the Codification (present value excepted), fair value is unique in that its definition, and guidance for measuring fair value, is applied ________ across all Codification topics requiring the use of 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 at the measurement date

consistently Fair Value

_________ are initially recorded at fair value Contributions payable are considered _______fair value measurements because they are not required to be remeasured at fair value in periods subsequent to initial measurement. the use of present value techniques to determine the fair value of a liability is generally acceptable when quoted market prices for the same, or similar, liabilities are not available. ASC 820-10 describes different techniques for measuring present value under the income approach: ■ The __________, which measures the present value of future cash flows using an estimated market discount rate. ■ An _____________, using a combination of expected cash flows (which may/may not be adjusted for risk) and discount rates (which may or may not be adjusted for risk). Two variations of this technique are available. The first technique is considered to be most appropriate when future cash flows are __________ in amount

contributions payable nonrecurring discount rate adjustment technique expected present value technique fixed or contractual

Fair Value - ______ assets & liabilities - measurements of assets & liabilities acquired in a business _________ - marketable equity securities not accounted for under ______ - measurement of______ or disposable cost obligations - impairments of ________ - initial measurements of __________ (a liability)

derivative combination equity method exit PP&E guarantees

fair value hierarchy, which prioritizes the use of ________ _______ Measurement is observable, price is quoted by market. ■ ______ Measurement is mostly observable (e.g., a quoted price is available for similar assets or liabilities). ■ _________Measurement relies heavily on unobservable inputs (such as management assumptions)

observable inputs Level 1: Level 2: Level 3:

the fair value option cannot be elected for employers' ________and for _________ payment obligations (both financial liabilities). _________ are defined as 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.* ______ are defined as 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.* Together, financial assets and liabilities are referred to as _________. __________ are defined as An asset that is not a financial asset. Nonfinancial assets include land, buildings, use of facilities or utilities, materials and supplies, intangible assets, or services.* ___________ are not defined in the Codification but can generally be viewed as liabilities that are not financial liabilities. Examples include obligations to deliver goods or services.*

pension obligations capital lease Financial assets Financial liabilities financial instruments Nonfinancial assets Nonfinancial liabilities

______States that ASC 820 generally applies whenever fair value measurements are permitted or required by other Codification topics ________Emphasizes that transaction prices are generally reflect fair value, at initial measurement, except in specified circumstances and provides examples of such circumstances. ______Establishes extensive disclosure requirements for assets and liabilities measured at fair value _______Provides illustrative examples and additional interpretive guidance for measuring fair value and classifying inputs within the fair value hierarchy and defines present value and describes measurement techniques.

section 15 scope section 30 initial measurement section 50 disclosure section 55 implementation guidance

Fair value measurements—both recurring and nonrecurring—are subject to extensive disclosure requirements. These include disclosure of the fair value hierarchy level (1, 2, or 3), as well as disclosure of the valuation techniques used to measure each class of assets and liabilities measured at fair value. Notably, items measured at fair value on a nonrecurring basis are only subject to these disclosure requirements for fair value measurements that occur _______________

subsequent to an item's initial measurement.