Ch 7.docx

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Department
Business Administration
Course
BUS 421
Professor
Howard Trottier
Semester
Winter

Description
Ch 7: Measurement Applications Exit Price: opportunity cost Ideal Situation: Based on the selling price of an asset in a well working market or the amount the firm has to pay to dispose of a liability FV Hierarchy: o Level 1: A or L for which a reasonably well working mkt price exists o Level 2: Assets and liabilities for which a market price can be inferred from the market prices of similar items o Quoted prices in non-active mkt for identical assets or liabilities o Inputs derived from or corroborated by observeable mkt info o Level 3: Assets and liabilities for which a market value cannot be observed or inferred – the firm shall use the best available information about how a market participant holding the asset or liability would value the item o Estimate how much a prospective purchaser would be willing to pay through expected future cash flows Historical cost = Cost – dep – impairment Ways to mitigate negative effects of FV: o Government intervention (investing public money in banking industry) o Relaxing legal capital constraints o Buying excess LT assets o Standard setters: o Certain LT financial assets allowed to be valued at amortized cost o Inactive market o Firms estimate FV Incentive exists for managers to sell illiquid assets whose values have fallen below value in use before a write down occurs o Therefore shareholders prefer historical cost o When value in use is high… o Managers inclined to sell even though proceeds may be less than value in use o Therefore SHs prefer FV
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