Fair Value Measurements

Fair Value Measurements What is a principle market? The market with the greatest volume or greatest activity for assets or liabilities. (THINK the market with the most products). How do you determine fair value when there is no principal market? You determine fair value that does not have a principal market by using the most advantageous market. What is fair value? The price that would be received to sell an asset or paying off a liability in an orderly transaction in the principle market (or most advantageous if no principle market) at the measurement date. It is the exit price which means the price to "get out". Fair value does NOT include transaction cost but may include TRANSPORTATION cost if the location is necessary. What are the fair value input levels (Hierarchy of Inputs)? Level 1: - observable input - highest priority - quoted prices in ACTIVE markets for IDENTICAL assets/liabs. - most reliable Level 2: - observable input - quoted prices for SIMILAR assets/liab in ACTIVE markets. - IDENTICAL in NON-ACTIVE marktes Level 3: - the discounted cashflow or income approach - unobservable inputs - based on a company's assumptions (ESTIMATE) - based on best available info. - ONLY use when no observable inputs Name and define the different market approaches (valuation techniques for fair value) M.I.C. Market approach: uses prices and other necessary information from the market that are identical or comparable assets/liabilities. (Ex. NY stock exchange used to get related stock prices)