ACCT90012 Chap.1 Fair Value Measurement

Fair Value Measurement

Start with the measurement object

Fair value analysis begins by identifying the asset or liability and the unit of account. A land parcel, a factory structure and a combined operating site can support different valuation premises, so the object must be fixed before a market price is selected.

Ask whether market participants would transact the items separately or together and whether another asset is required to generate value. This prevents a valuation from mixing a stand-alone price with cash flows that assume a combined use.

Record the reporting date, condition and location because each can change the available market evidence.

Use an exit-price perspective

The measurement is market-based rather than entity-specific. Replace management's private intention with assumptions that informed market participants would use in an orderly transaction at the measurement date.

The reporting entity's special financing, unusual transaction cost or desire to retain an asset does not define the price. Keep transaction costs separate from transport costs: transaction costs belong to the transaction, while transport can adjust price when location is a characteristic of the asset.

The distinction is easy to lose when a question supplies both amounts beside the same quoted market price.

Choose the market in the right order

Use the principal market when one exists; it is the market with the deepest transaction volume and activity accessible to the entity. Only when there is no principal market does the most advantageous market control.

Compare net proceeds to identify that alternative, but measure fair value using the selected market's price adjusted for transport, not by deducting transaction costs from the fair value itself.

State the market-selection step before arithmetic so a numerically larger net amount does not silently displace a principal market.

Test highest and best use

For a non-financial asset, consider whether an alternative use is physically possible, legally permissible and financially feasible. The use that maximises value may require demolition, conversion or combination with complementary assets.

Deduct the costs necessary to make the alternative available when comparing premises. Do not assume the current use is wrong merely because another use is imaginable; the alternative must survive all three constraints and reflect market-participant assumptions.

Explain whether the resulting premise is stand-alone or in combination with other assets.

Match technique to evidence

The market approach uses observable transactions for identical or comparable assets. The cost approach asks what a market participant would pay to replace service capacity, after obsolescence. The income approach converts future amounts to a current value.

Choose the technique because it fits the available inputs, not because it is the shortest calculation. Maximise observable inputs, disclose material unobservable inputs and reconcile the technique with the chosen premise.

A replacement-cost figure cannot be attached to a site whose value comes from redevelopment without explaining the inconsistent uses.

Build a present-value bridge

For a liability, forecast the market participant's expected cash outflow, include overhead and profit where relevant, adjust for inflation and compensation for uncertainty, then discount for time value and non-performance risk without double-counting risk.

Write each transformation on its own line. An original check is: labour 120,000 plus overhead 60,000, plus a 15% contractor margin gives 207,000 before inflation. Grow and risk-adjust that amount, then discount the resulting future cash flow.

The sign and timing must remain visible from input to present value.

Control the hierarchy and disclosures

Classify inputs by observability rather than by the technique's name. A valuation can use more than one level of input, and its hierarchy classification follows the lowest-level input significant to the whole measurement.

Explain recurring versus non-recurring measurement, technique changes and sensitivity to significant unobservable inputs where required.

A disclosure answer should tell a reader what was measured, how, from which market evidence and why uncertainty matters; listing hierarchy labels without connecting them to inputs is not analysis.

Audit the conclusion

Finish by reconciling object, market, premise, technique and inputs.

Change one assumption at a time: remove access to the preferred market, prohibit the alternative use or increase a significant unobservable input. Identify the first conclusion that changes. This counter-case test catches answers that quote a market price without proving why it governs. It also separates a fair-value measurement from a valuation recommendation, an entity-specific investment value or a forced-sale amount.

What this chapter covers

• 01

  Identify the measurement object

• 02

  Select the principal or most advantageous market

• 03

  Test highest and best use

• 04

  Apply market and present-value techniques

• 05

  Explain the disclosure consequence

Present value of a restoration obligation

Key terms

Principal market

The accessible market with the deepest transaction volume and activity for the asset or liability.

Highest and best use

The physically possible, legally permissible and financially feasible use that maximises a non-financial asset's value.

Exit price

The price obtained on an asset sale or required for a liability transfer in an orderly measurement-date transaction.

Fair Value Measurement FAQ

Exam move

Retrieve the five steps for Fair Value Measurement, recompute the independent example, write the journal or presentation consequence, then change one controlling assumption and identify the first conclusion that changes.

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