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What is fair value measurement?
Fair value measurement is the process of determining the value of an asset or liability based on 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.
Why is fair value measurement important?
Fair value measurement provides users of financial statements with relevant and reliable information about the value of an entity's assets and liabilities, which can help them make informed decisions about the entity's financial position and performance.
What are the key principles of fair value measurement?
The key principles include using market-based inputs, considering the perspective of market participants, and ensuring that the measurement is based on an exit price.
What is impairment in the context of fair value measurement?
Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell or its value in use.
How is impairment testing conducted?
Impairment testing involves comparing the carrying amount of an asset with its recoverable amount. If the recoverable amount is lower than the carrying amount, an impairment loss is recognized in the financial statements.
How does fair value measurement impact financial reporting?
Fair value measurement impacts financial reporting by affecting the valuation of assets and liabilities on the balance sheet and the recognition of gains or losses in the income statement.
What are some challenges in fair value measurement and impairment testing?
Challenges include determining appropriate valuation techniques, obtaining reliable market data, and making subjective judgments about future cash flows and market conditions.
What are the characteristics of fair value?
Fair value reflects market value (not entity-specific value), is an exit value, incorporates changes that market participants consider at the measurement date, and requires judgment to measure.
What is the fair value hierarchy?
The fair value hierarchy classifies inputs into three levels: Level 1 uses quoted prices in active markets, Level 2 uses observable inputs not included in Level 1, and Level 3 uses unobservable inputs based on the best information available.
What assumptions does a Fair Value Measurement make about market participants?
It assumes that market participants are independent, knowledgeable about the asset or liability, and willing to enter into a transaction for the asset or liability.
