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Terms in this set (47)
the GAAP/IFRS rules and framework regarding fair value apply in every circumstance except: (3)
-share based compensation
-measurement based on/using vendor specific objective evidence of fair value
-fair value measurements for leases
the price that would be received to SELL an asset or to PAY OFF a liability in an orderly transaction between market participants in the principal (or most advantageous) market at the measurement date under current market conditions
fair value: market based or entity based?
difference between fair value and replacement cost:
replacement cost is what you would pay to ACQUIRE an asset while fair value is what you would receive for SELLING an asset
does fair value include transaction costs?
no, unless it is being used to calculate the most advantageous market
fair value of a NON financial asset assumes...:
the highest and best use of the asset
non performance risk:
the risk that the obligation will not be fulfilled
the fair value of a liability should include which type of risk?
non performance risk
fair value of a financial asset and liability assumes...:
everything that market participants would use in pricing the asset or liability, including assumptions about risk
how should an entity measure the fair value of it's own equity instrument?
it should be measured from the perspective of a market participant who holds that instrument as an asset
one in which the asset or liability is exposed to the market for a period before the measurement date (cannot be forced!!!)
5 characteristics of a market participant:
1. buyers/sellers who are independent
2. knowledgable about the asset or liability
3. able to transact for the asset or liability
4. willing to transact for the asset or liability
5. acting in their economic best interest
the market with the greatest volume or level of activity for the asset or liability
most advantageous market:
market with the best price for the asset or liability after considering transaction costs
when would you use the most advantageous market?
when there is no principal market for an asset/liability
how to find fair value amount when using the most advantageous market:
-find the prices of the assets/liabilities, NET of any transaction costs
-the fair value amount reported will be the best price of the asset/liability WITHOUT transaction costs included
are transaction costs ever included in the final fair value measurement?
no, only used when determining fair value in the most advantageous market
most common non financial asset:
"highest and best use" concept for non financial assets:
idea that the fair value measurement of a non financial asset takes into account the market participant's ability to generate economic benefits by using the asset in its highest and best use
"highest and best use" concept for liabilities:
this concept is not relevant to liabilities
"highest and best use" concept for financial assets:
this concept is not relevant to financial assets
if you purchase stock, do you have an asset or liability?
stock is a financial asset (right to future dividends)
if you sell (issue) stock, do you have an asset or liability?
liability (liability to pay dividends to stockholders)
what does "issuing stock" mean?
means you are selling stock to a party who, in exchange, pays you money
GAAP/IFRS framework for measuring fair value:
framework that outlines the valuation techniques that can be used to measure fair value and that establishes a hierarchy of the inputs that can be used in these techniques
3 valuation techniques for fair value:
1. market approach
2. income approach
3. cost approach
(or a combination of all 3)
market approach to measuring fair value:
uses prices and other relevant information from market transactions involving IDENTICAL or COMPARABLE assets or liabilities to measure fair value
income approach to measuring fair value:
converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value (finds PV)
cost approach to measuring fair value:
uses current replacement cost to measure the fair value of assets
the cost approach can only be used for:
fair value hierarchy:
prioritizes the inputs, levels 1-3, that can be used in the fair value valuation technique
which level of inputs have the highest priority when it comes to fair value measurement?
which level of inputs have the lowest priority when it comes to fair value measurement?
level 1 inputs:
quoted prices in ACTIVE markets for IDENTICAL assets or liabilities that the reporting entity has access to on the measurement date (also called observable inputs)
what level of inputs should you maximize? which level should you minimize?
maximize levels 1 and 2, minimize level 3
which level of inputs are most reliable?
level 2 inputs:
inputs other than quoted market prices that are directly or indirectly observable for the asset or liability
the most common level 2 inputs include:
-quoted prices for SIMILAR assets/liabilities in ACTIVE markets
-quoted prices for IDENTICAL or SIMILAR assets in INACTIVE markets
level 3 inputs:
-unobservable inputs for the asset or liability
-estimates and assumptions
fair value disclosures are meant to provide statement users with information regarding: (3)
1. the valuation techniques, inputs, judgements, and assumptions used to arrive at the fair value measurements
2. the uncertainty in the fair value measurements at the reporting date
3. how changes in fair value measurements affect the entity's performance and cash flows
the entity must provide these 4 disclosures regarding fair value measurements:
1. quantitative info about significant unobservable inputs
2. discussion of the sensitivity of level 3 measurements to changes in inputs
3. info about non financial assets/liabilities whose measurements differ from highest and best use
4. hierarchy for items that are not measured on the BS but are disclosed in the notes
another name for the price at which you purchased shares of stock:
buzz word for level 1 input:
"quotable market price"
when will there be a holding LOSS amount on stock at year end?
when fair value at year end is LESS than original cost
when will there be a holding GAIN amount on stock at year end?
when fair value at year end is GREATER than original cost
affect on assets, liabilities, and equity when stock decreases in value:
-liabilities no change
3 situations in which you don't have to measure fair value:
1. when it's not practicable to measure fair value
2. when it cannot be reasonably determined
3. when it cannot be measured with sufficient reliability
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