1. Fair Value Framework

Página 1

Accounting Standards Codification 820 - Provides a clear framework for how to measure fair value to achieve increased consistency and comparability in fair value measurements and expanded disclosure when fair value measurements are used. Also includes the following:

A definition of fair value for GAAP purposes;

A framework for measuring (determining) fair value for accounting purposes;

A set of required disclosures about fair value measurement when it is used.

Fair Value Defined

Definition: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Focuses on how to measure Fair Value not when to measure fair value.

Other things to consider when determining Fair Value:

Fair Value is a market-based measurement, not an entity-specific measurement.

The determination of Fair Value is for a particular asset or liability. Fair Value determination should consider the attributes of the specific asset or liability being measured (Condition, Location, Restriction on asset use or sale, etc.)

Fair Value determination should not take place under a forced liquidation or distress sale.

Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement assumes that a transaction takes place at that date.

The assumed transaction establishes a basis for estimating the price to sell the asset or transfer the liability.

The hypothetical transaction to sell the asset or transfer the liability is assumed to occur in the principal market or, alternatively, in the absence of a principal market, the most advantageous market for the asset or liability, to which the entity has access, after taking into account transaction costs and transportation costs.

The price determined in the principal or most advantageous market should not be adjusted for transaction costs which do not measure a characteristic of the asset or liability. However, cost incurred to transport the asset or liability to its principal or most advantageous market would be used to adjust fair value for measurement purposes.

Market participants, as used in the definition, are buyers and sellers of the asset or liability that are:

a. Independent of the reporting entity;

b. Acting in their economic best interest;

c. Knowledgeable of the asset or liability and the transaction involved;

d. Able and willing, but not compelled, to transact for the asset or liability.

Application of Definition to Assets, Liabilities, and Shareholder's Equity

A. Application to Assets -

The determination of fair value of a nonfinancial asset assumes the highest and best use of the asset by market participants, even if the intended use of the asset by the reporting entity is different; the concept of highest and best use does not apply to measuring the fair value of financial assets (or liabilities).

The highest and best use must take into account what is 1.) Physically possible, 2.) legally permissible, and 3.) financially feasible at the measurement date.

The highest and best use of an asset may be:

a. In-use: Maximum value to market participants would occur through its use in combination with other assets as a group;

b. In-exchange: Maximum value to market participants would occur principally on a standalone basis; that is , the price that would be received in a current transaction to sell the (single) asset.

B. Application to Liabilities - Determination of a fair value liability assumes that the liability is transferred to a market participant at the measurement date; it is not settled or canceled.

C. Application to Shareholder's Equity - The requirements for the determination of fair value apply to instruments classified in shareholder's equity that are measured in at fair value (e.g., equity interest issued as consideration in a business combination). When a quoted price for the transfer of an identical or similar shareholder's equity instrument is not available, and the identical instrument is held by another party as an asset, the instrument should be measured from the perspective of the party that holds the item as an asset.

D. Application to Net Financial Assets and Financial Liabilities - An exception to the requirement that fair value of qualified financial assets and financial liabilities be measured separately is permitted when a reporting entity manages risk associated with a portfolio of financial instruments on a net exposure basis, rather than on a gross exposure basis.

Applicability