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Section 4250: Fair Value Measurements
[U.S. GAAP Codification Topic]
820 Fair value measurements and disclosures
820-10 Overall
--> Updated by ASU No. 2009-05, August 2009, Measuring liabilities at fair value
--> Updated by ASU No. 2009-12, September 2009, Investments in certain entities that calculate net asset value per share (or its equivalent)
[U.S. GAAP before the Codification]
SFAS 157, September 2006, Fair value measurements and disclosures
FSP FAS 157-4, April 2009, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
1. Fair Value is
--> the price an entity would receive when an asset is sold
or
--> the price an entity would pay when a liability is transferred.
2. Such transaction should be
an orderly transaction
--> between market participants
--> at the measurement date.
3. Valuation Techniques: three approaches
(1) Market approach
--> based on information from market transactions
(2) Income approach
--> based on future income
--> e.g., present value techniques
(3) Cost approach
--> based on current replacement cost
4. Three levels of inputs: Fair Value Hierarchy
(1) Level 1 inputs
--> unadjusted quoted prices
in active markets
for identical assets or liabilities
(2) Level 2 inputs
--> quoted prices
for similar assets or liabilities
in active markets
--> quoted prices
for identical or similar assets or liabilities
in markets that are not active
(3) Level 3 inputs
--> unobservable inputs
for the asset or liability
5. FASB Staff Position FAS 157-4, April 2009
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
6. FSP FAS 157-4 addresses:
(1) When the "volume and level" of activity decreased significantly
(2) When the transactions are not orderly
7. Quoted prices need a significant adjustment
--> if the "volume and level" of activity decreased significantly
--> in the markets that are not active: Level 2 inputs
--> FSP FAS 157-4 does not change Level 1 inputs
8. FSP FAS 157-4 provides additional guidance
--> when the transactions are not orderly
--> FSP FAS 157-4 superseded FSP FAS 157-3
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