2. Recognition and Measurement

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I. Fair Value Determination - When an asset is acquired or a liability is assumed in an actual transaction, the price paid to acquire the asset or the price received to assume the liability (the transaction price) is an entry price - the price paid when an asset or liability is initially recognized, which may or may not be fair value. Fair value of an asset or a liability is the price that would be received to sell an asset or paid to transfer a liability - an exit price.

The Transaction Price (initial price paid to acquire an asset or price received to transfer a liability) might not be fair value (exit price) if:

a. The transaction is between related parties

b. The transaction takes place when the seller is under duress (i.e., in a liquidation sale);

c. The unit of account for the transaction price is different from the unit of account that would be used to measure the asset or liability at fair value. For example, if the asset or liability is measured at fair value is 1.) part of a business in a business combination, 2.) there are unstated rights associated with an asset that are measured separately, or 3.) the quoted price includes transactions costs - such as with oil.

d. The market in which the transaction price takes place is different from the principal market (or most advantageous market).

If an entity is required or permitted to measure an asset or liability initially at fair value and the transaction price at initial recognition differs from fair value, a gain or loss is recognized in earnings at initial recognition of the asset or liability (unless otherwise required by GAAP for that item). Would be recorded at FV but a gain or loss would be recorded in the period of initial recognition.

II. Measurement Techniques

A. Valuation Techniques/Approaches - 3 Approaches:

Market Approach - This approach uses prices and other relevant information generated by market transactions involving assets or liabilities that are identical or comparable to those being valued.

Income Approach - This approach converts future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

Cost Approach - This approach uses the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), adjusting for obsolescence.

B. Valuation Technique/Approach Selection - DEPENDS on amount of data available; single valuation vs. multiple valuation; Under all valuation techniques, the valuation must take into account appropriate risk adjustments, including a risk premium for uncertainty.

C. Consistent Application of Approach/Technique

1. Valuation techniques used to measure FV should be consistently applied

2. A change in valuation technique or its application is appropriate if the change will result in a more representative fair value. Better info is avail. Treated as changes in accounting estimates.

III. Fair Value Option

A. An entity can apply the fair value option to an eligible item only on the date when one of the following events occur (an election date):

1. When the item is first recognized

2. When an eligible firm commitment is established

3. Specialized accounting for an item ceases to exist

4. An investment becomes subject to equity method accounting (but is not consolidated) or to a VIE that is no longer consolidated

5. An event that requires the item to measured at fair value, such as a business combination or significant modifications to debt instruments.