Fair Value Measurements and Disclosure Summary
A reporting entity's intentions regarding ______________ ______ ______________ or settling or otherwise fulfilling ______ _____________ are _____ ____________ in FV measurement and ___________ ______ _____ _____________.
holding the asset; the liability; not relevant; should not be considered
Use the _____ ________________ market only if ___ ______________ _________ exists.
Most advantageous; no principle market
Level 3 inputs should be used when ___ ______________ _________ are available.
No observable inputs
Identifying the asset or liability subject to fair value measurement Costs that are not considered in determining the FV of the asset or liability include:
Transaction costs
What costs are considered in determining the most advantageous market?
Transaction costs and transportation costs
Identifying the asset or liability subject to fair value measurement Costs that are considered in determining the FV of the asset or liability include:
Transformation costs and transportation costs
What are Level 3 inputs?
Unobservable inputs for the asset of liability
What are level 2 inputs?
All observable inputs other than level 1. Includes: 1. Quotes prices (in non-active or in active markets for similar assets or liabilities) 2. Inputs other than quoted prices that are observable, and 3. Inputs that are not directly observable but are corroborated by observable market data.
What is the measurement date?
The measurement date is the date on which fair value measurements are made. ALSO, this is the balance sheet date because fair value measurements measurements are as of a specific balance sheet date.
What costs are not considered in determining the most advantageous market?
Transformation costs
Topic 820 is covered under which Statement of Financial Accounting Standard?
SFAS 157 issued by the FASB in Sept. 2006
Authoritative literature regarding fair values: 2. Provides a _________________ _______________ ________________ that clarifies the fair value measurement objectives and its application under various standards that require (or permit) fair value measurements
conceptual framework approach
Fair value is the _______ __________ in the _____________ __________. In other words, always use the _____________ _________ to measure fair value if it exists.
exit price; principle market; principle market
Distinguishing between financial and non-financial assets and liabilities 3. Non-financial assets and liabilities are priced based upon the concept of "____________ _____ ________ _____" Regarding non-financial assets, ___________ _____ _______ ______ establishes value based upon the use of the asset by __________ _______________ that would ________________ the benefit of the asset. These are known as _________ _____________.
highest and best use; highest and best use; market participants; maximize; value premises.
Characteristics of market participants ("buyers or sellers of an asset or a liability in the exit market"). From ASC 820-10-20 definition of market participants: 1. They are ________________ of each other; that is, they are not ______________ ___________.
independent; related parties
What are transportation costs?
Costs to move the asset
What are transformation costs?
Costs to recondition the asset
Authoritative literature regarding fair values: 3. Expands ______________ _____________________ about the use of fair value
Disclosure requirements
Distinguishing between financial and non-financial assets and liabilities 2. Non-financial asset and liabilities ____ _____ ___________ ___________ ______ ________. Examples include land.
Do not convert directly into cash
A ____________ _____________ is not an orderly transaction. (e.g., a ____________ ________________ ___ _____________ _________). This is significant as "distressed transactions" are not orderly and therefore not indicative of FV.
Forced transaction; forced liquidation or distress sale
Transactions to sell the asset or transfer the liability are "_____________ ________________" as the entity ______ ______ sold the asset or transferred the liability at the measurement date; if it has no FC measurement would be needed. _________ is not an issue nor is the ___________ ____ ________ into a transaction at the measurement date.
Hypothetical transactions; has not; intent; ability to enter
What did IFRS issue in response to Topic 820>
IFRS 13 - Fair Value Measurement issued in May 2011
What are transaction costs?
Incremental direct costs to sell the asset or transfer the liability (E.g., Commissions)
Inputs and the fair value hierarchy? What are inputs?
Inputs refer broadly to assumptions that market participants would use in pricing the asset or liability
Identifying the asset or liability subject to fair value measurement 3. _________________ is required to determine whether a restriction is an attribute of __________ or the ___________ ___ _____________ whose FV is being measured
Judgment; entity; asset or liability
Should adjustments to Level 1 inputs be made?
NO!
Should adjustments to Level 2 inputs be made?
Yes, adjustments to level 2 inputs can be made
Characteristics of market participants ("buyers or sellers of an asset or a liability in the exit market"). From ASC 820-10-20 definition of market participants: 1A. Can a related party transaction be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms?
Yes, only if it was entered into at market terms.
Indicators that transactions "may not be orderly" 3. The seller is in or near _______________ ___ ________________ (i.e., distressed sale) or the seller was required to sell to meet ______________ ___ ________ __________________ (i.e., forced sale)
bankruptcy or receivership; regulatory or legal requirements
Distinguishing between financial and non-financial assets and liabilities 4. Highest and best use concept establishes either a _____________ premise of value or a _______________ premise of value.
combined; standalone
Distinguishing between financial and non-financial assets and liabilities 1. Financial assets and liabilities "_____________ ____________ _______ __________." Examples include both equity and debt securities, notes receivable and payable, and derivatives.
convert directly into cash
Valuation techniques from ASC 820-10-20 Income approach: valuation techniques that ___________ __________ _____________ (for example, cash flows or income and expenses) to a __________ ___________ (that is, discounted) amount. The fair value measurement is determined on the basis of the value indicated by __________ ___________ _________________ about those ____________ ______________.
convert future amounts; single current; current market expectations; future amounts
Evaluating the definition of fair value Fair value measurement is a ____________ _________ ___________________ that is **always from the perspective of ______________ _______________; not from the ______________ _____________ ________________. It is based on the __________________ __________ _____________ _________________ ____________ _____ _____ __________ ______ _________ ____ _____________.
market based measurement; market participants; reporting entity's perspective; assumptions that market participants would use in pricing the asset or liability
Identifying the asset or liability subject to fair value measurement 1. FV is determined for a "particular asset or liability". As a result the entity must take into account any characteristics of the particular asset or liability "if _______________ _______________ would take the characteristics into account in _________________ ______ __________ ____ _______________ at the measurement date.
market participant; pricing the asset or liability at the measurement date.
This is the market that __________________ the amount that would be received to sell the asset or _________________ the amount that would be paid to transfer a liability after adjusting for _______________ __________ (excluded from the FV measurement) and ___________________ __________ (included in FV measurement)
maximizes; minimizes; transaction costs; transportation costs.
Inputs are either _______________ (most desirable) or ______________ (least desirable) and should reflect assumptions that _________ ______________, acting in their economic best interest would use in pricing the asset or liability.
observable; unobservable; market participants
The definition of FV contemplates an "_____________ ______________." According to Topic 820, an ___________ ______________ (same as above) is one that "assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities.
orderly transaction; orderly transaction
Indicators that transactions "may not be orderly" 4. The transaction price is an ____________ when compared with other recent transactions for the same or similar asset or liability.
outlier
Identifying the asset or liability subject to fair value measurement 2. This includes "attributes that are specific to an asset or liability being valued, including any _________________ on the asset/liability that ________________ _____________________ would consider that may affect its fair value.
restrictions; market participants
Authoritative literature regarding fair values: 1. Establishes a
single definition of fair value
All disclosure requirements focus on "fair value measures ______________ ___ ______________ (subsequent measurement)
subsequent to initial recognition
Indicators that transactions "may not be orderly" 2. There was a _________ ______ ______________ _____________ _________, but the seller marketed the asset or liability to a ____________ market participant.
usual and customary marketing period; single
Characteristics of market participants ("buyers or sellers of an asset or a liability in the exit market"). From ASC 820-10-20 definition of market participants: 4. They are __________ ____ _________ into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so. remember a forced transaction is not an orderly transaction.
willing to enter
What are disclosures designed to do??
Enhance the transparency of financial statements
Synergies __________ ____________ ______________ related to the asset or liability are also not relevant to FV measurements and ____________ ______ _____ _____________
Entity specific synergies; should not be considered
Evaluating the definition of fair value Entry price vs Exit price: Fair value measurement relies on the notion of an ________ __________ rather than an _____________ ___________ to measure fair value
Exit price; entry price
What is the definition of fair value?
Fair value is the (exit) 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.
Characteristics of market participants ("buyers or sellers of an asset or a liability in the exit market"). From ASC 820-10-20 definition of market participants: 2. They are __________________- having a _______________ __________________ about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary.
Knowledgeable; reasonable understanding
Recall from the introductory portion of this outline that the focus of new disclosure requirements is predominantly on ___________ FV measurements
Level 3
What is the principle market?
Market in which the reporting entity would normally enter into a transaction to sell an asset or transfer a liability with the GREATEST VOLUME AND LEVEL OF ACTIVITY. (Total market volume > entity-specific volume)
Example, manufacturing entity owns an identical $1,000 face value bond as a broker/dealer. On the same date, both decide to sell their identical bonds. The manufacturing entity sells the bond through a retail market for $950 while the broker/dealer sells the bond through the wholesale market for $975. The identical bonds sold in different markets have different exit prices. Which exit price should the manufacturing entity use?
Only the retail market because the wholesale market isn't available to them.
Valuation techniques from ASC 820-10-20 Market approach: a valuation technique that uses ___________ and other ______________ _____________ generated by _________ ______________ involving ____________ or __________________ assets, liabilities, or a group of assets and liabilities, such as a business.
Prices; relevant information; market transactions; identical; comparable
Identification of the ___________ _________ implies that the reporting entity _____ __________ to the particular market in question.
Principle market; has access
What are Level 1 inputs?
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Do transportation and transformation costs reduce or increase the FV of an asset of liability?
Reduce
Valuation techniques from ASC 820-10-20 Cost approach: A valuation technique that reflects the amount that would be requird currently to ____________ _____ ___________ ______________ of an asset (often referred to as ____________ _________________ ________)
Replace the service capacity; current replacement cost
The determination of the principal market is made from the perspective of the ____________ _______.
Reporting entity
Certain fair value measurements may utilize inputs at different levels in the hierarchy. When inputs at multiple levels are used to determine a fair value measurement, the fair value measurement's place in the hierarchy is based ______ _____ __________ _______ _______ ______ ___________ __________ ____ _____ _______ ____________.
Upon the lowest level input that significantly effects the fair value instrument.
Characteristics of market participants ("buyers or sellers of an asset or a liability in the exit market"). From ASC 820-10-20 definition of market participants: 3. They are _______ to enter into a transaction for the asset or liability
able
Evaluating the definition of fair value An "entry price is the price paid to ______________ _____ _____________ or the amount received to __________ _____ ____________ in an exchange transaction.
acquire the asset; assume a liability
Indicators that transactions "may not be orderly" 1. There is not ____________ ___________ to the market for a _______________ ___________ ________ _____________________ ______ to allow for _____________ activities that are ____________ ______ _________________ for transactions involving such assets or liabilities under current market conditions.
adequate exposure; period before the measurement date; marketing; usual and necessary
