7. According to the FASB’s Master Glossary, what is the definition of fair value

Question

7. According to the FASB’s Master Glossary, what is the definition of fair value? 8. Also, in accordance to the Glossary; market participants are buyers and sellers in the principal market for the asset or liability that have four characteristics. What are two of those four characteristics? Accountants’ Handbook Chapter 25: 9. Fair values are estimates, and are frequently used in assessing the realizable value of assets and liabilities and indicating whether an allowance or write-down of the asset or liability might be required. 1) What is management’s responsibility? 2) What is the auditor’s responsibility? ACCT310 Week Seven Homework Concluded: Page 2 of 2 10. The income approach is a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount. What are the two required fundamental steps for the income approach? 11. What is another term used interchangeably with “discount rate?” 12. Analysts often employ survivor curves to assist in determining the remaining useful life of an asset. What are the names of the X and Y axis of the survivor curve?

Explanation / Answer

Answer 7 : FASB state that fair value represent the amount at which an asset (or liability) could be bought (o incurred) or sold (or settled) in a current transaction between willing parties and 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.

Answer 8 : Market Participants are buyers and sellers in the principal market for the asset or liability have the following charaterstics :

a. Independent of the reporting entity.

b. Knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information, additional information that might be obtained through due diligence efforts that are usual and customary.

c. Able to transact for the asset or liability

d. Willing to transact for the asset or liability.

Answer 9 : (i) Management is responsible for making accounting estimates (including estimates related to a business combination or valuation of company stock)

(ii) The Auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financial statements as a whole. The auditor should :

(a) Obtain an understanding of the events and circumstances that result in an asset being valued.

(b) Evaluate that the methodology used to estimate value is appropriate.

(c) Evaluate the assumptions underlying the methodology used are not unreasonable in the circumstances.

Answer to 10 : The two fundamental steps for Income approach are :

(a) Calculating the expected future cash flow that may arise due to equity/debt

(b) Calucting the present value of these cash flows using a approprite cost of capital

Answer to 11 : Discount rate is alson interchangable with term " Cost of Capital" i,e the rate at whih all future value are converted to their current market value.

Answer to 12 : The x-axis represents the age of the assets, and the y-axis represents the percentage of the original group of assets that are still surviving at a given age.

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