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Definition - Fair Value according to ASC 820
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
Definition - PRICE - important characteristics
Exit price
NOT what it would cost to purchase or replace
Definition - ORDERLY TRANSACTION - important characteristics
Entity is not forced to sell
Sale takes place in:
Principal market or
Most advantageous market
What does HBU mean?
Highest and Best Use
-> What a market participant would likely use the asset for
What are the premises for the unit of account?
In exchange (separately)
In continued use (value maximization in continued use with other assets)
Are SELLING COSTS included in the Fair Value?
Transaction costs: Not included
Transportation costs: Included (sometimes, if necessary to get to principal market)
Why are transaction costs not included?
Thought to be specific to the transaction
Definition of the principal market
Greatest volume of activity for the asset or liability
-> Has to have activity and volume
Definition of the most advantageous market
Market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability
-> WOULD BE RECEIVED, not Fair Value!
Definition - level 1
Market prices for identical assets/liabilities on active markets
Definition - level 2
Less active market for identical assets
Active market for similar assets
Less activity or no market activity for similar assets but reliable market data/inputs to impute value (e.g., Black Scholes)
Definition - level 3
Unobservable inputs (anything subjective)
What can be the timing of fair value estimates?
Recurring measurements (e.g., investment assets for sale)
Nonrecurring measurements (e.g., goodwill)
Fair value - what needs to be disclosed
Timing of FV estimates
Summary by levels
Tabular presentation summarizing FV measurements separately by level and timing
Additional disclosures
Valuation technique, inputs utilized, transfer between levels (1,2,3)
Change in valuation technique (2,3)
Valuation process, policies and procedures, quant. information about unobservable inputs (3)
What standards give information about when and what to measure at FV
ASC 320 (marketable securities)
ASC 805 (business combinations)
ASC 350 (intangible assets)
ASC 360 (impairment of long-term assets)
Hierarchy assignment - steps
1 - Active vs. inactive market
2 - Valuation technique used
3 - Classification of inputs and measurement in the FV hierarchy
Last changed2 years ago