CPA - FAR - Fair Value

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1. Can a debt Yes. 5. Crossroads Co. chooses to $81

investment report a financial asset at its
classified as A debt investment with readily determinable fair value. The asset trades in Incorrect. When there are
held-for- fair value and is classified as held-for-trading two different markets; multiple markets for an
trading with must be measured at fair value. The however, neither market is the asset, the fair value of an
readily requirement that certain financial assets and principal market for the asset is determined based
determinable liabilities be measured and reported at fair financial asset. In the first on prices in the principal or
fair value be value as provided by other existing GAAP market, sales proceeds are most advantageous market.
measured at requirements is not changed by the provisions $76, which is net of The second market is more
fair value? of the fair value option. transaction costs of $6. In the advantageous because it
second market, sales has the higher selling price.
2. Can a debt Yes.
proceeds are $80, which is net In addition, fair value
investment
of transaction costs of $1. excludes transaction cost;
classified as An entity may elect to measure and report a
What amount should therefore, the valuation of
held-to- debt investment classified as held-to-maturity
Crossroads report as the fair the asset would be $81. The
maturity be at fair value. Traditionally, debt investments
value of the asset? response of $80 is incorrect
measured at classified as held-to-maturity would be
because it includes
fair value? measured and reported at amortized cost, but
transaction costs.
the provisions of the fair value option permit
such investments to be measured and 6. Giaconda, Inc. acquires an Income.
reported at fair value at the option of the asset for which it will measure
reporting entity. the fair value by discounting
future cash flows of the asset.
3. Can a No
What best describes this fair
liability
value measurement approach?
under a An entity may not elect to measure and report
lease financial assets and liabilities recognized 7. In determining the fair value Exit Price.
contract be under leases at fair value. Such assets and of an asset or liability, would
measured at liabilities are specifically excluded from the fair value of the asset or The appropriate basis for
fair value? financial instruments that may be measured at the fair value of the liability determining the fair value of
fair value at the option of an entity, and would be determined using an entry an asset or a liability is an
be measured under other existing accounting price or an exit price? exit price.
requirements.
8. In the instance that a No.
4. Can a No. significant amount of raw
liability material inventory is acquired Since the raw material
under a An entity may not elect to measure and report for cash from a bankrupt inventory was acquired from
pension plan financial assets and liabilities recognized supplier, would the entry price a supplier in bankruptcy, it is
be measured under a pension plan (or other postretirement to acquire the inventory be likely that the transaction
at fair value? and postemployment plans) at fair value. Such the most likely fair valuation? occurred when the seller
assets and liabilities are specifically excluded was under duress. Therefore,
from financial instruments that may be it is likely that the price paid
measured at fair value at the option of an (an entry price) does not
entity, and would be measured and reported represent fair value. Exit
under other exiting accounting requirements. price is not representative of
fair value when the item is
sold under duress.
9. Is replacing the kind and
amount of information that
would have been provided if
the fair value option had not
been used with information
related to fair value an
expected outcome of fair value
reporting?
10. Name two benefits of the fair
value framework with respect
to fair value measurement and
fair value reporting?
11. On January 15, 2008, Able Co.
made a significant investment
in the debt securities of Baker
Co., which it intends to hold
until the debt matures. Able's
fiscal year-end is December 31.
If Able Co. intends to measure
and report its investment in
Baker Co. debt securities at fair
value as permitted by ASC 820
on which one of the following
dates must Able elect to
implement the fair value
option?
12. True or False: A firm that elects
to use fair value to measure
eligible financial assets and
financial liabilities, specific
disclosures are required for
both quarterly and annual
financial statements.
13. True or False: A purpose of the
fair value framework as set
forth in ASC 820, "Fair Value
Measurement" was to Establish
new measurement
requirements for financial
instruments.
No. 14. True or False: A purpose of the fair value framework True
as set forth in ASC 820, "Fair Value Measurement"
The disclosures required was to Provide a uniform definition of "fair value" for
when the fair value option GAAP purposes.
is used are not intended to
15. True or False: For a firm that elects to use fair value True
replace the kind and
to measure eligible financial assets and financial
amount of information that
liabilities, specific disclosures are required on the
would have been
Balance Sheet
provided if the fair value
option had not been used. 16. True or False: For a firm that elects to use fair value True
Rather, the intent is to to measure eligible financial assets and financial
provide the same kind and liabilities, specific disclosures are required on the
amount of information that Income Statement
would have been 17. True or False: Inputs that incorporate the entity's True
provided if the fair value assumptions may be used in ascertaining fair value.
option had not been
18. True or False: Only observable inputs can be used in False
elected.
ascertaining fair value.
Increased consistency,
increased comparability
January 15, 2008:
If Able Co. intends to
elect to implement the fair
value option for its
investment in Baker's debt,
it must make its election
on the date it first
recognizes the investment,
which is January 15, 2008.
True
False
19. True or False: False. 24. When the fair value of an Cost approach.
Quoted market asset is determined as the
prices should Quoted market prices should not be amount that currently would When fair value is
be adjusted for adjusted for a "blockage factor" when a be required to replace the determined as the amount
a "blockage firm holds a sizable portion of the asset service capacity of the asset, that currently would be
factor" when a being valued. A "blockage factor" occurs which one of the following required to replace the
firm holds a when an entity holds a sizable portion of valuation techniques has been service capacity of an
sizable portion an asset (or liability) relative to the trading used? asset (i.e., current
of the asset volume of the asset or liability in the replacement cost), the cost
being valued in market. Using a "blockage factor" would approach has been used.
determining adjust the market value for the impact of
25. When valuing certain financial Instrument-by-instrument
fair value. such a large block of securities being sold,
instruments, a company that basis
but is not permitted in determining fair
has elected the fair value
value.
measurement option must
20. Under U.S. Between items measured at fair value on a apply the accounting
GAAP, the recurring basis and items measured at fair measurement based on what
disclosure value on a nonrecurring basis criteria?
requirements
when fair value
measurement is
used are
differentiated
by which of the
following
classifications?
21. What Comparisons between entities that use
comparisons different measurement methods for similar
are intended to assets and liabilities.
be facilitated
when a firm Comparisons between assets and liabilities
measures of a single entity that uses different
certain of its measurement methods for similar assets
financial assets and liabilities.
and financial
liabilities at fair
value?
22. What does Replacement Cost
"Service
Capacity of an
Asset Mean"?
23. When making a On an Instrument-by-instrument basis.
fair Market
Value Election,
how must the
election be
applied to
assets?