ACCO 340 Lecture Notes - Lecture 7: Financial Statement, Historical Cost, Legal Liability

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bronzemammoth297

2 Feb 2017

School

Concordia University

Department

Accountancy

Course

ACCO 340

Professor

Elizabeth Peltier- Wagner

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Document Summary

Level 1: assets/liabilities for which a reasonably well-working market price exists. Level 2: assets/liabilities for which a market price can be inferred from the market prices of similar items. Level 3: assets/liabilities for which a market value cannot be observed or inferred. Then, the firm shall use the best available information to value the items. This requires the firm to envisage such a prospective purchaser and estimate how much the purchaser would be willing to pay, mostly based on expected future cash flows of the asset. Derecognition: removing an asset from the balance sheet and revenue recognized on the resulting sale. Firms do not retain their accounts receivables; they are rather securitized and transferred to another entity. Firms have an incentive to derecognize these assets since this can improve their leverage ratios. *application of the measurement approach (current value) to accounting for goodwill creates severe reliability problems.

Related Questions

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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ACCO 340 Lecture Notes - Lecture 7: Financial Statement, Historical Cost, Legal Liability

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