Fair Value Framework

Question 1

ASC 820

Answer 1

provides a framework for how to measure fair value to achieve increased consistency and comparability in fair value measurements and expanded disclosure when fair value measurements are used

Question 2

Objectives of ASC 820

Answer 2

A definition of fair value for GAAP purposes;
A framework for measuring (determining) fair value for accounting purposes;
A set of required disclosures about fair value measurement when it is used.

Question 3

US GAAP and IFRS on Fair Value

Answer 3

no significant differences between related to the meaning of fair value, its measurement or required disclosures

Question 4

Fair Value

Answer 4

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.

Question 5

Fair Value Assumptions

Answer 5

1. Fair value is a market-based measurement, not an entity-specific measurement
2. Can be a stand-alone or group of asset(s) or liability(ies)
3. Transaction occurs in normal market conditions; not under conditions of liquidation or distress
4. Market: the transaction occurs in either the principal market or in the most advantageous
5. Transaction Costs: The price used to measure fair value should NOT be netted for transaction costs; costs incurred to transport the asset or liability to or from the market are used to adjust fair value price
6. Market participants: Buyer and seller are not related parties (independent); acting in their economic best interest; both parties are knowledgeable about the item; and both parties are willing and able to complete the transaction but are not being forced to do so
7. (Non-Financial Asset) Highest and best use: item being valued will be put to the highest and best use by market entity resulting in maximization of value

Question 6

Principal Market

Answer 6

where the holder of the asset or liability could locate the greatest volume of similar transfers

Question 7

Most Advantageous Market

Answer 7

where either the sales price for an asset can be maximized or the transfer cost for a liability can be minimized (do NOT net transaction cost when pricing)

Question 8

Practical Expedient Exception

Answer 8

ASC 820 allows company to measure fair value of an investment that does not have a quoted market price but reports a net asset value per share (NAV). Applies to alternative investments: hedge funds, private equity funds, real estate funds, venture capital funds, common/collective funds, and offshore funds.

Question 9

Exit Price

Answer 9

Amount received to sell an asset or paid to transfer a liability (appropriate basis for determining fair value)

Question 10

Orderly transaction

Answer 10

1. Occurs at measurement date
2. Occurs under current market conditions
3. Not a forced liquidation or distressed sale
   (usually hypothetical)

Question 11

Highest and Best assumptions

Answer 11

1. Physically possible
2. Legally permissible
3. Financially feasible

Question 12

Market participants:

Answer 12

1. Buyer and seller are not related parties (independent); 2. Acting in their economic best interest; both parties are knowledgeable about the item; and
2. Both parties are willing and able to complete the transaction but are not being forced to do so

Question 13

ASC 820 Exempts Fair Value on

Answer 13

1. Inventory Valuing

2. Share Based payment transactions

Question 14

Entry Price

Answer 14

Price paid to acquire an asset or price received to assume a liability, may or may not = fair value

Question 15

Fair Value Methods

Answer 15

1. Cost approach
2. Market approach
3. Income approach

Question 16

Cost Approach (Fair Value Method)

Answer 16

This approach uses the amount that currently would be required to replace the service capacity of an asset

• Functional obsolescence, physical deterioration, and economic obsolescence should be considered
• BV is not related to the FV

Question 17

Income Approach (Fair Value Method )

Answer 17

converts future amounts to a single present amount, uses discounted cash flows to estimate a value

Question 18

Market Approach (Fair Value Method )

Answer 18

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

Question 19

Instruments NOT Eligible for Fair Value Option

Answer 19

1. An investment in a subsidiary that is to be consolidated
2. An interest in a variable interest entity that is to be consolidated
3. obligations or assets related to pension or other employee-oriented plans
4. Lease related financial assets or liabilities
5. Demand deposit liabilities of financial institutions
6. Financial instruments that are classified by the issuer as a component of shareholders’ equity

Question 20

Instruments Eligible for Fair Value Option

Answer 20

1. recognized financial assets and financial 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 3rd party

Question 21

Fair Value election Dates

Answer 21

1. when item is first recognized
2. when an eligible firm commitment occurs
3. when the accounting treatment of an investment in another entity changes

Question 22

Accounting at eligible date

Answer 22

determine carrying value and fair value, determine difference, write item up or down, recognize gain or loss in current income

Question 23

Fair Value Inputs

Answer 23

1. Observable Inputs

2. Unobservable Inputs

Question 24

Observable Inputs

Answer 24

derived from market data from sources independent of reporting entity (this input should be Maximized)

Question 25

Unobservable Input

Answer 25

entity's assumptions based on best info available in circumstances (this input should be minimized)

Question 26

Fair Value Input Hierarchy

Answer 26

Level 1 - observable and identical Level 2 - observable but similar Level 3 - not observable

Question 27

FV Hierarchy Level 1

Answer 27

1. highest level, most reliable, use whenever available 2. sometimes adjustments are proposed - permitted: liquidity discount - not permitted: control premium, blockage discount

Question 28

FV Hierarchy Level 2

Answer 28

1. quoted prices in active markets for similar items 2. quoted prices in inactive markets for similar (or identical) items 3. observable inputs other than market prices that are relevant 4. inputs derived from or corroborated by observable market data using correlation or other means

Question 29

FV Hierarchy Level 3

Answer 29

1. Unobservable inputs for item being valued 2. lowest level with least desirable inputs 3. may use reporting firm's internal data 4. based on assumptions or inferences that market participants would make

Question 30

Disclosure Requirements- On a Recurring Basis

Answer 30

1. FV is determined and applied to an item period after period (FV at reporting date, valuation technique and inputs must be disclosed) 2. Includes: table showing items at each level of FV hierarchy, transfers into and out of each level, Level 3 a reconciliation of beginning and ending balances and description of the valuation process and significant assumptions.

Question 31

Disclosure Requirements- On a Nonrecurring Basis

Answer 31

1. FV is determined and applied only when certain conditions or situations occur (FV at reporting date, valuation technique and inputs must be disclosed) 2. Includes: reasons for the FV measurement, level of FV hierarchy which it falls, For Levels 2 and 3 a description of any changes in techniques 3. Level 3 measurements require: effect of the measurement on earnings or OCI, quantitative info about the unobservable inputs used, disclose fact and why if highest and best use of nonfinancial assets differs from current use

Question 32

Required disclosures in annual financial reports for entity that uses FV

Answer 32

1. Level of FV hierarchy, 2. valuation techniques, 3. discussion of any change from prior period in valuation techniques used