Area III - Select Transactions: Fair Value Measurements

Vocabulary flashcards covering fair value measurement concepts, valuation techniques, assumptions, and input hierarchy levels from the CPA review notes.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.

Market Approach

A valuation technique that estimates fair value using prices and other relevant information from market transactions involving identical or comparable assets or liabilities.

Income Approach

A valuation technique that estimates fair value based on the present value of future cash flows expected to be derived from the asset or paid to settle the liability.

Cost Approach

A valuation technique that estimates fair value based on the amount that would be required currently to replace the service capacity of an asset (often called current replacement cost).

Exit Price

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Highest and Best Use Assumption

A valuation assumption for nonfinancial assets that determines fair value based on the use that is physically possible, legally permissible, financially feasible, and creates the greatest economic benefit.

Market Participant Assumptions

Valuation assumptions reflecting what independent, knowledgeable buyers and sellers would use in pricing an asset or liability, rather than entity-specific assumptions.

Unit of Account

The determination of what is being measured for fair value, specifying whether the valuation applies to an individual asset/liability or a group of assets/liabilities as set by the relevant accounting standard.

Fair Value Hierarchy

A framework that prioritizes the inputs used in valuation techniques, giving the highest priority to observable inputs and the lowest priority to unobservable inputs.

Level 1 Inputs

Quoted prices in active markets for identical assets or liabilities (most reliable).

Level 2 Inputs

Observable inputs other than quoted prices in active markets, such as prices for similar assets, interest rates, or yield curves.

Level 3 Inputs

Unobservable inputs based on the entity's own assumptions about market participant expectations (least reliable).