Exam 3: Fair Value Measurement

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)?

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

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

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

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?

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?

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

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?

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.

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

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.

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

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?

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?

What is the primary characteristic of an orderly transaction?

Three widely used valuation techniques are:

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

Another description of fair value is the current exit price.

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

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.