Fair Value & Option to Report Fin Assets & Liab @ Fair Value
Recognize various items @ fair value:
Trading Securities or Available-For-Sale or Market-to-Market
Investments in equity securities (business combination)
Impairment losses (= reduction in carrying value of asset)
All derivatives are reported @ fair value
Exceptions that are not qualify for FV:
Pension, post-employment benefits
Financial Equity Instruments
Share based pmts and stock options
Qualify for the Fair Value election:
Most investments: Available-for-sale w unrealized gains/losses, held to maturity securities (from amortized cost)
Firm commitments, like forward exchange contracts, foreign currency, etc.
Unrealized gains/losses are reported in income
FV = the price that would be received to sell an asset or paid to transfer a liab in an orderly transaction b/w market participants @ measurement date
3 valuation techniques: MIC
Market Approach - Market transactions
Income Approach - Revenue, cost savings, earnings, etc.
Cost Approach - replacement cost
3 levels of inputs for valuation:
Level 1 - most reliable (observable data from actual market)
Level 2 - observable but not identical assets/liab
Level 3 - unobservable data
Disclosures - consistency & comparability in FV measurement
Using Cash Flow info & PV in accounting measurements:
Risk - probability to receive or pay the cash
Timing - pmts are expected to be received
IR - Market rates
Amount of cash flows:
Traditional Approach - most likely cash flow amounts
Expected Approach - weighted average