ACCT20002 Lecture Notes - Lecture 3: Market Participant, Income Approach, Credit Risk

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pinkporcupine846

7 Sep 2018

School

University of Melbourne

Department

Accounting

Course

ACCT20002

Professor

All

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Why do we need an accounting standard for fair value: fair value is used as a measure of assets and liabilities at some point in many aasb"s. Exploration for and evaluation of mineral resources. Aasb/ifrs13 fair value measurement: the objective of fair value measurement standard is: Provide a single standard for measuring fair value; and. Market participant perspective - what is the highest and best use for an asset/liability. 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. E. g. of characteristics include the condition and location of the asset, restrictions (if any) on the sale or use of the asset: the asset or liability measured at fv might be either: Any inputs used to determine the cash ows generated must be those of a market participant. Any entity speci c savings or costs must be excluded.

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FASB SFAS 157 was issued September 2006 for application tofinancial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.This Statement, which applies to assets and liabilities, definesfair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. The statement does notapply to assets acquired and liabilities assumed in an acquisitionof a business or non-profit activity by a not-for-profit entitythat are required to be measured at fair value under FASB StatementNo. 164. The objective of a fair value measurement is to determinethe price that would be received to sell the asset or paid totransfer the liability at the measurement date which is the exitprice. The fair value measurement assumes that the asset orliability is exchanged in an orderly transaction between marketparticipants. For assets, fair value measurement assumes thehighest and best use of the asset by market participants,considering the use of the asset that is physically possible,legally permissible, and financially feasible at the measurementdate. The highest and best use of the asset establishes thevaluation premise. For liabilities, it is assumed that theliability is transferred to a market participant at the measurementdate and that the nonperformance risk relating to that liability isthe same before and after its transfer. The fair value of theliability shall reflect the nonperformance risk relating to thatliability. As in our text, the position in the statement is thatvaluation techniques must be consistently applied. It emphasizesthose valuation techniques using the market approach, incomeapproach, and cost approach to measure fair value. In some cases asingle valuing technique may serve the purpose, however in others,using multiple techniques may be more appropriate. The informationthat is available will help to determine which method that shouldbe used. Examples are provided in Appendix A to illustrate thevarious approaches for certain transactions. The statement alsoestablishes a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value by placing theminto three broad levels in order to increase consistency andprovide better comparability. Level 1 is given the highest priorityand is based on quoted prices (unadjusted) in active markets foridentical assets or liabilities that the reporting entity has theability to access at the measurement date. Level 2 is based oninformation other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly through substantiation with observable market data.Level 3 has the lowest priority and is based on unobservable inputsfor the asset or liability, primarily, inputs that reflect thereporting entityâs own assumptions.

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ACCT20002 Lecture Notes - Lecture 3: Market Participant, Income Approach, Credit Risk

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