Statement of Financial Accounting Standards No. 157 - Paper Audit ...

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elevant data points in the market approach fall at or near the higher end of the range. Accordingly, the reporting entity determines that the fair value of the machine is $48,000. Example 5—Software Asset A17. The reporting entity acquires a group of assets. The asset group includes an income-producing software asset internally developed for license to customers and its complementary assets (including a related database with which the software asset is used). For purposes of allocating the cost of the group to the individual assets acquired, the reporting entity measures the fair value of the software asset. The reporting entity determines that the software asset would provide maximum value to market participants through its use in combination with other assets (its complementary assets) as a group. Therefore, the highest and best use of the software asset is in-use. (In this instance, the licensing of the software asset, in and of itself, does not render the highest and best use of the software asset in-exchange.) A18. The reporting entity determines that in addition to the income approach, sufficient data might be available to apply the cost approach but not the market approach. Information about market transactions for comparable software assets is not available. The income and cost approaches are applied as follows: a. Income approach. The income approach is applied using a present value technique. The cash flows used in that technique reflect the income stream expected to result from the software asset (license fees from customers) over its economic life. The fair value indicated by that approach is $15 million. b. Cost approach. The cost approach is applied by estimating the amount that currently would be required to construct a substitute software asset of comparable utility (considering functional, technological, and economic obsolescence). The fair value indicated by that approach is $10 million. A19. Through its application of the cost approach, the reporting entity determines that market participants would not be able to replicate a substitute software asset of comparable utility. Certain attributes of the software asset are unique, having been developed using proprietary information, and cannot be readily replicated. The reporting entity determines that the fair value of the software asset is $15 million, as indicated by the income approach. 24
Inputs to Valuation Techniques A20. This Statement emphasizes that valuation techniques used to measure the fair value of an asset or liability should maximize the use of observable inputs, that is, inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Examples of markets in which inputs might be observable for some assets and liabilities (for example, financial instruments) include the following: a. Exchange market. In an active exchange market, closing prices are both readily available and generally representative of fair value. An example of such a market is the New York Stock Exchange. b. Dealer market. In a dealer market, dealers stand ready to trade (either buy or sell for their own account), thereby providing liquidity by using their capital to hold an inventory of the items for which they make a market. Typically, bid and ask prices (representing the price the dealer is willing to pay and the price at which the dealer is willing to sell, respectively) are more readily available than closing prices. Over-the-counter markets (where prices are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC) are dealer markets. For example, the market for U.S. Treasury securities is a dealer market. Dealer markets also exist for some other assets and liabilities, including other financial instruments, commodities, and physical assets (for example, certain used equipment). c. Brokered market. In a brokered market, brokers attempt to match buyers with sellers but do not stand ready to trade for their own account. In other words, brokers do not use their own capital to hold an inventory of the items for which they make a market. The broker knows the prices bid and asked by the respective parties, but each party is typically unaware of another party’s price requirements. Prices of completed transactions are sometimes available. Brokered markets include electronic communication networks, in which buy and sell orders are matched, and commercial and residential real estate markets. d. Principal-to-principal market. Principal-to-principal transactions, both originations and resales, are negotiated independently with no intermediary. Little information about those transactions may be released publicly. Fair Value Hierarchy A21. To increase consistency and comparability in fair value measurements and related disclosures, this Statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level 25
Page 1 and 2: Financial Accounting Series NO. 284
Page 3 and 4: Summary This Statement defines fair
Page 5 and 6: (blockage factor). This Statement e
Page 7: instruments as of the beginning of
Page 10 and 11: Copyright © 2006 by Financial Acco
Page 13 and 14: Statement of Financial Accounting S
Page 15 and 16: disaggregated) for purposes of appl
Page 17 and 18: Application to Assets 12. A fair va
Page 19 and 20: of the elements in the transaction,
Page 21 and 22: paragraph 19). The disclosure provi
Page 23 and 24: sufficient to absorb the quantity h
Page 25 and 26: c. For fair value measurements usin
Page 27: 38. At the date this Statement is i
Page 30 and 31: A3. The judgments applied in differ
Page 32 and 33: include those buyers that initially
Page 34 and 35: participants have technology in a m
Page 38 and 39: in the fair value hierarchy within
Page 40 and 41: the one- and two-year options on th
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Page 44 and 45: higher of its fair value in-use as
Page 46 and 47: measure fair value are required in
Page 48 and 49: Assets Measured at Fair Value on a
Page 50 and 51: d. The price for bearing the uncert
Page 52 and 53: liability being measured, it may be
Page 54 and 55: cash flows, it likely will be highe
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Page 59 and 60: Appendix C BACKGROUND INFORMATION A
Page 61 and 62: Scope Share-Based Payment Transacti
Page 63 and 64: epresent the fair value of the inst
Page 65 and 66: C20. Accordingly, the guidance for
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Page 69 and 70: or liability (for example, a commod
Page 71 and 72: Application to Liabilities C39. For
Page 73 and 74: whether changes in a debtor’s cre
Page 75 and 76: entity’s credit standing makes th
Page 77 and 78: Valuation Techniques C53. This Stat
Page 79 and 80: C60. In its discussions, the Board
Page 81 and 82: generally provide the most reliable
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that indicates that market particip
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asset or liability. The Board concl
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alone, would not be cost beneficial
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in the statement of financial posit
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adjustment to the opening balance o
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International Financial Reporting S
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Pronouncement Statement 65* Stateme
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Pronouncement Interpretation 45* In
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Pronouncement FSP AAG INV-1 and SOP
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the proceeds received or the presen
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services received in exchange, and
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E6. FASB Statement No. 19, Financia
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. Paragraph 8: Broadcasters may bar
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cost or marketfair value for each t
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and cost required for the buyer to
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significant, tThe fair value of an
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Statement describe possible additio
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the fair value of the services rece
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. Paragraph 112 (glossary), as amen
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ase the estimate of future cash flo
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ased on valuation techniques) used
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value of an asset (or liability) in
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securities. An acquiring entity oft
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as the basis for the measurement, i
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of those cash flows that are embodi
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current rate. Any downward revision
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current credit-adjusted risk-free r
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Date Incurred 12/31/03 12/31/04 12/
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market prices in active markets are
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Course of Action Cash Flows Estimat
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i. Paragraph A13: The following tab
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accordance with paragraph 7, the en
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expected present value technique of
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E29. Statement 133 Implementation I
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upon the assignment because the pro
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