Deck 3: Fair Value Measurement

Question 1

Which of the following would be accounted for under IFRS 13?

A) Share-based payments
B) Leasing and lease classification
C) Agricultural activity
D) Retirement benefit plan assets

Answer 1

Agricultural activity

Question 2

Match the input level with its definition (Level 1, Level 2, or Level 3).

-level 1

A)Unadjusted quoted prices in active markets for identical assets or liabilities
B) Inputs other than quoted prices that are either directly or indirectly observable for the assets or liabilities
C)Unobservable inputs for the asset or liability

Answer 2

Unadjusted quoted prices in active markets for identical assets or liabilities

Question 3

Match the input level with its definition (Level 1, Level 2, or Level 3).

-level 2

A)Unadjusted quoted prices in active markets for identical assets or liabilities
B) Inputs other than quoted prices that are either directly or indirectly observable for the assets or liabilities
C)Unobservable inputs for the asset or liability

Answer 3

Inputs other than quoted prices that are either directly or indirectly observable for the assets or liabilities

Question 4

Match the input level with its definition (Level 1, Level 2, or Level 3).

-level 3

A)Unadjusted quoted prices in active markets for identical assets or liabilities
B) Inputs other than quoted prices that are either directly or indirectly observable for the assets or liabilities
C)Unobservable inputs for the asset or liability

Question 5

Entity A buys a piece of machinery for $250,000. To make the purchase, Entity A makes a cash payment of $150,000 and assumes $100,000 of debt from a local bank. Entity A sells the machinery a short time later for $140,000 in cash and settling the debt, which at the time requires $105,000. What is the fair value of the machinery?

A) $140,000
B) $150,000
C) $245,000
D) $250,000

Question 6

Entity A hopes to sell a large printing machine that it purchased three years ago. The value at the time of purchase was $80,000. Entity A will need to spend $5,000 to repair the machine to selling conditions and will spend an additional $5,000 in transportation costs. Entity A also will incur a commission of 5% of the sale. The market price for the machine is currently $75,000. What is the fair value that Entity A should measure the machine at?

A) $61,250
B) $65,000
C) $70,000
D) $75,000
E) $80,000

Question 7

Entity A receives 100 acres of land from Oil Entity. Oil Entity specifies that Entity A must use the land as a wildlife reserve. Entity A recognizes that similar restrictions would not apply to other companies if they used the land. Using the land as an oil field would maximize the fair value of the land. Should Entity A use the value of the land as a wildlife reserve or as an oil field to determine the fair value?

A) Wildlife reserve
B) Oil Field
C) Neither

Question 8

Three widely used valuation techniques are:

A) Market approach
B) Income approach
C) Replacement approach
D) Cost approach

Question 9

Determining the fair value of a building by using value per square foot of similar buildings is an example of what level in the fair value hierarchy?

A) Level 1
B) Level 2
C) Level 3

Question 10

Entity A holds 75% ownership of Entity B's 100,000 shares. For its separate financial statements, Entity A accounts for the shares at fair value under IFRS 9 (meaning that unit of account is each share). For its consolidated financial statements, Entity A accounts for the shares as a cash-generating unit. The quoted price is $10 per share, and there is a $2 control premium per share. What would be the fair value for the separate and consolidated financial statements?

A) Separate statements - $750,000; Consolidated statements - $900,000
B) Separate statements - $750,000; Consolidated statements - $750,000
C) Separate statements - $750,000; Consolidated statements - $600,000

Question 11

What is the primary characteristic of an orderly transaction?

A) Willing buyers and sellers
B) Not a forced liquidation or distressed sale.
C) Exposure in the principle market.
D) Finding the buyer willing to pay the best price.

Question 12

Market participants are buyers and sellers in the principal market for the asset or liability that have all of the following characteristics except:

A) They have expertise in the principle market and are experienced buyer of similar assets or liabilities.
B) They are independent of each other.
C) They are knowledgeable about the asset or liability and use all available information to appropriately benefit from the asset or settle the liability.
D) They are able to enter into a transaction for the asset or liability, meaning that they possess the legal, financial and operating capabilities.

Question 13

Fair value is an entity-specific measurement.

Question 14

Another description of fair value is the current exit price.

Question 15

The fair value measurement of a liability or equity must consider non-performance risk.

Question 16

The transaction to sell the asset or settle the liability is a hypothetical transaction as of the measurement date that assumes an appropriate period of exposure to the market to be considered orderly.

Question 17

Costs that are considered in determining fair value include transformation costs and transportations costs and transactions costs.

Question 18

Financial assets may use, as a practical expedient, inputs such as bid and ask prices, mid-market pricing or other conventions to measure fair value.

Question 19

Non-financial assets use the concept of highest and best use in measuring fair value.

Question 20

The valuation technique used to measure fair value should maximize the use of relevant unobservable inputs.

Question 21

Fair value reflects current market conditions, at the measurement date, from the perspective of a market participant, and not the entity's current expectations about future market conditions.

Question 22

If there is no principal market, the price in the most advantageous market is used.

Question 23

Entity A has an asset that needs to be measured at fair value. The following information is given:
a. Value in the principal market - $500
b. Value in the most advantageous market - $550
c. Value in the least advantageous market -$465
What should be the fair value of the asset?

Question 24

What is the cause of a day one gain or loss?

Question 25

Entity A holds a large portion of Entity B's stock. The market value of the stock is $50 per share. Because of the large block of shares that Entity A wants to sell, Entity A would have to accept a discount of $5 per share to sell them all (a blockage factor). What is the fair value of the shares that Entity A holds (for each share)?

Question 26

Define Level 1, Level 2, and Level 3 inputs.

Question 27

Heyward Entity (HE) acquired a diesel truck on June 1, 20X7 for $75,000. HE paid $25,000 in cash and obtained a $50,000 loan from a local bank. On December 20, 20X7, HE sold this truck for $70,000 and repaid $50,000 owed to the bank. What is the exit price for the diesel truck? What is the exit price for the loan liability?

Question 28

Kentucky Derby Entity (KDE) owns a very successful horse track that draws large crowds on race day. Recently real estate developers have been buying the land surrounding the race track in order to construct office and residential buildings. The real estate developers offered KDE $15,000,000 for its property. KDE had an independent appraisal putting the value of the property as a horse track (its present use) at $13,000,000. KDE management has no intention of selling the property to anyone and intends to operate the track for horse racing indefinitely. What is the fair value of the KDE race track that will be stated in KDE's financial statements?