Framework, Overview and Stmts: Introductions and Definitions

Even when there is no observable market to provide pricing information about the sale of an asset or transfer of a liability at the measurement date, a fair value measurement assumes that a transaction takes place at ______.

that date

Are there any significant differences between IFRS and the FASB? If so, what are they?

No significant differences since the FASB and the IASB worked together on this.

What is a principal market?

One with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.

Define "exit price".

The price that would be received to sell an asset or paid to transfer a liability.

What is the definition 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.

Which of the following benefits is the fair value framework intended to accomplish with respect to fair value measurement and fair value reporting? Increased Consistency; Increased Comparability a) Yes; Yes b) Yes; No c) No; Yes d) No; No

A - yes, yes The framework for the use of fair value in GAAP is intended to achieve both increased consistency and increased comparability in fair value measurement and reporting.

In the determination of fair value of a nonfinancial asset, the highest and best use of the asset may be determined as occurring through use and/or through exchange. Through Use Through Exchange a) Yes Yes b) Yes No c) No Yes d) No No

A - yes, yes The highest and best use of a nonfinancial asset (i.e., its maximum value) to market participants may occur either principally through its use with other assets or principally on the price that would be received to sell (exchange) the asset.

The determination of fair value may be for: A Standalone Asset or Liability; A Group of Assets or Liabilities a) Yes; Yes b) Yes; No c) No; Yes d) No; No

A - 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).

Fair value determination should consider ____ (e.g. condition, location, restriction on asset use or sale, etc) of the specific asset or liability being measured.

attributes

The highest and best use of an asset may be either ____ or ____.

In use, in exchange

The maximum value to market participants would occur principally on a stand-alone basis, that is, the price that would be received in a current transaction to sell the (single) asset.

In-exchange

The maximum value to market participants would occur through its use in combination with other assets as a group.

In-use

What is the most advantageous market?

One in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the asset.

List the dates when an entity may elect to use fair value option for an eligible item.

When item is first recognized; When firm commitment occurs; When financial, an asset previously reported at fair value with unrealized gain/loss in earnings, no longer qualifies for that fair value treatment; When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation; When an item is measured at fair value at the time of an event, but does not require fair value measurement at subsequent reporting dates

The determination of fair value of a nonfinancial asset assumes the highest and best use of the asset by market participants. The highest and best use must take into account what is ____ possible, _____ permissible, and _____ feasible at the measurement date.

physically, legally, financially

Although the transaction and transportation costs are taken into account in determining the most advantageous market, _____ costs are not used in determining the fair value of an asset or liability in the most advantageous market.

transaction

List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.

An investment in a subsidiary or variable interest to be consolidated; Employers' and plans' obligations for pension benefits, other postretirement benefits, post-employment benefits; Financial assets and liabilities under lease accounting; Demand deposit liabilities of financial institutions; Financial instruments classified by the issuer as a component of shareholders' equity.

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?

C - $1000. Correct! 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.

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

C - $16,000 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.

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.

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. A. I only. B. II only. C. I and II only. D. II and III only.

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.

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.

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 for 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.

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.

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following? a) What is physically possible. b) What is financially feasible. c) How the reporting entity would use the asset. d) What is legally permissible.

C - how the reporting entity would use the asset. In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.

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 a) Yes; Yes b) Yes; No c) No; Yes d) No; No

C - 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.

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.

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.

Define "entry price".

List the items that entities may elect to measure and report at fair value.

What are the three valuation techniques (or approaches) that should be used in determining fair value for Generally Accepted Accounting Principles purposes?

Market approach; Income approach; Cost approach.

List the situations where the entry price may not be the exit price.

The transaction is between related parties; The transaction occurs when the seller is under duress; The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value; The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred.

What are market participants?

They are buyers and sellers of the asset or liability that are independent of the reporting entity, acting in their economic best interest, are knowledgeable of the asset or liability, and are able and willing to transact for the asset or liability.

Describe the income approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

This approach converts future amounts to a single present amount.

Describe the market approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.

Describe the cost approach for determining fair value for Generally Accepted Accounting Principles (GAAP) purposes.

This approach uses the amount currently required to replace the service capacity of an asset.

The use of fair value measurement is required for some items in financial statements and optional for other items. Is the framework for determining fair value measurement, as set forth in ASC 820, "Fair Value Measurement," generally required to be followed in circumstances where fair value measurement is required and/or in circumstances where fair value measurement is elected by a firm? Fair Value Required Fair Value Elected a) Yes Yes b) Yes No c) No Yes d) No No

a) yes, yes The framework for determining (measuring) fair value provided in ASC 820, "Fair Value Measurement," must be followed (with very limited exceptions) whenever fair value measurement is used, either as required by GAAP or permitted by GAAP as an alternative that is elected by an entity.

ASC 820 provides a framework for how to measure fair value to achieve increased ____ and ____ in fair value measurements and expanded disclosure when fair value measurements are used.

consistency and comparability