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5 Cards in this Set

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Fair Value
FV is a MARKET SPECIFIC MEASURE NOT entity specific measure


FV= exit price (the price to sell an asset or transfer a liability, NOT an entrance price (price to acquire or assume a liability)...therefore FMV NOT the price to acquire an asset or assume a liability
FV includes TRANSPORTATION COSTS NOT transaction costs


FV measurement=price in the principal market for an asset or liability

Fair value measurement framework

Valuation techniques:

Market approach: price and other market info of comparable or identical assets or liablities is used

Income approach: future cash flows or earnings are discounted to determine FV==>PV (Discounted cash flows)

Cost approach: current replacement used


Fair Value hierarchy

Level 1inputs: most reliable/high priority fair value measurement===>quoted prices in active markets for IDENTICAL assets or liabilities

Level 2 inputs: similar==> inputs other than level 1 that are directly or indirectly observable

Level 3 inputs: least reliable/least priority==>discounted cash flows==>should be used only when there are no observable (level 1 or level 2) inputs or when undue cost and effort is required to obtain observable inputs

Quoted stock prices in active stock market= level 1 inputs




Prices from OBESERVED input involving SIMILAR assets---quoted prices for identical asset in markets that are NOT active= Level 2 inputs




Projected cash flows are an UNobservable input---internally genrated cash flow projections for a related asset or liabilty! = classified as Level 3 input




!Not level 2 becuase the internally generated cash flow projection is based on "UNoberservable" inputs reflecting a company's "own assumptions" about the way the related asset or liability would be priced





Principle Market vs. Most advantageous market
Principle market: market with greatest volume or level of activity

Most advantageous market: best ;price for asset or liability after considering trasaction costs
eg:



-No principal market for the financial asset



Market A quoted price 76 transaction costs 5

Market B quoted price 74 transaction costs 2



When no principal market for the financial asset==> Most advantageous market is the fair value meaurement



-transaction costs NOT included in fair value measurement BUT used to determine most advantageous market as follows:



Market A: Net Price=Quoted price - transaction cost= 76 - 5= 71



Market B: Ne Price=Quoted price - transaction cost= 74 - 2= 72



Since Market B net price > Market A net price= Market B is most advantageous market and the quoted price in Market B (74) is the fair value of the asset


--If market A were the principal market for the asset then $76 would be the fair value o the asset

Change in valuation technique to measure fair Value

= change in accounting estimate NOT change in accounting principle