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FAS 157 Fair Value

FAS 157 FAIR VALUE MEASUREMENT

FASB 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The requirement of mark-to-market and fair value accounting has been in place for years and is only one part of the broader context of fair value accounting.

FAIR VALUE DEFINITION

  • The fair value of an asset or liability is “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.”

ORDERLY TRANSACTION

  • An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction.

PRINCIPLE MARKET:

  • A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.

MARKET PARTICIPANTS

  • Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are:  Independent…Knowledgeable… Able to transact…Willing to transact.

HIGHEST AND BEST — USE

  • A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date.

VALUATION FRAMEWORK

MARKET APPROACH

  • The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.  For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparable.

INCOME APPROACH

  • The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted).  The measurement is based on the value indicated by current market expectations about those future amounts.

COST APPROACH

  • The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.

FAIR VALUE DISCLOSURE

LEVEL 1

  • Inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

LEVEL 2

  • Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

LEVEL 3

  • Inputs are unobservable inputs for the asset or liability.  Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

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