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

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the one- and two-year options on the shares and corroborated by the implied volatility for three-year options on comparable entities’ shares, provided that correlation with the one- and two-year implied volatilities is established. e. Licensing arrangement. For a licensing arrangement that is acquired in a business combination and that was recently negotiated with an unrelated party by the acquired entity (the party to the licensing arrangement), a Level 2 input would include the royalty rate at inception of the arrangement. f. Finished goods inventory at retail outlet. For finished goods inventory that is acquired in a business combination, a Level 2 input would include either a price to customers in a retail market or a wholesale price to retailers in a wholesale market, adjusted for differences between the condition and location of the inventory item and the comparable (similar) inventory items so that the fair value measurement reflects the price that would be received in a transaction to sell the inventory to another retailer that would complete the requisite selling efforts. Conceptually, the fair value measurement should be the same, whether adjustments are made to a retail price (downward) or to a wholesale price (upward). Generally, the price that requires the least amount of subjective adjustments should be used for the fair value measurement. g. Building held and used. A Level 2 input would include the price per square foot for the building (a valuation multiple) derived from observable market data, for example, multiples derived from prices in observed transactions involving comparable (similar) buildings in similar locations. h. Reporting unit. A Level 2 input would include a valuation multiple (for example, a multiple of earnings or revenue or a similar performance measure) derived from observable market data, for example, multiples derived from prices in observed transactions involving comparable (similar) businesses, considering operational, market, financial, and nonfinancial factors. Level 3 Inputs A25. Level 3 inputs are unobservable inputs for the asset or liability, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk) developed based on the best information available in the circumstances. Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. 15 Examples of Level 3 inputs for particular assets and liabilities follow. 15 A measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability. 28
a. Long-dated currency swap. A Level 3 input would include interest rates in a specified currency that are not observable and cannot be corroborated by observable market data at commonly quoted intervals or otherwise for substantially the full term of the currency swap. The interest rates in a currency swap are the swap rates calculated from the respective countries’ yield curves. b. Three-year option on exchange-traded shares. A Level 3 input would include historical volatility, that is, the volatility for the shares derived from the shares’ historical prices. Historical volatility typically does not represent current market participant expectations about future volatility, even if it is the only information available to price an option. c. Interest rate swap. A Level 3 input would include an adjustment to a mid-market consensus (nonbinding) price for the swap developed using data that are not directly observable and that cannot otherwise be corroborated by observable market data. d. Asset retirement obligation at initial recognition. A Level 3 input would include expected cash flows (adjusted for risk) developed using the reporting entity’s own data if there is no information reasonably available without undue cost and effort that indicates that market participants would use different assumptions. That Level 3 input would be used in a present value technique together with other inputs, for example (1) a risk-free interest rate or (2) a credit-adjusted risk-free rate if the effect of the reporting entity’s credit standing on the fair value of the liability is reflected in the discount rate rather than in the expected cash flows. 16 e. Reporting unit. A Level 3 input would include a financial forecast (for example, of cash flows or earnings) developed using the reporting entity’s own data if there is no information reasonably available without undue cost and effort that indicates that market participants would use different assumptions. Transaction Prices and Initial Fair Value Measurements A26. This Statement clarifies that in many cases the transaction price, that is, the price paid (received) for a particular asset (liability), will represent the fair value of that asset (liability) at initial recognition, but not presumptively. 17 Example 7 illustrates situa- 16 FASB Statement No. 143, Accounting for Asset Retirement Obligations, illustrates the application of the expected present value technique to an asset retirement obligation measured at fair value at initial recognition under that Statement. (See Appendix C of Statement 143.) 17 The guidance in this Statement applies for derivatives and other financial instruments that are measured at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, including hybrid financial instruments. Therefore, this Statement nullifies the guidance in footnote 3 of EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” 29
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 36 and 37: elevant data points in the market a
Page 38 and 39: in the fair value hierarchy within
Page 42 and 43: tions in which the price in a trans
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
Page 57 and 58: Appendix C BACKGROUND INFORMATION A
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
Page 67 and 68: clearly, the Board revised the defi
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
Page 83 and 84: not sufficient to absorb the quanti
Page 85 and 86: similar guidance in paragraph AG72,
Page 87 and 88: that indicates that market particip
Page 89 and 90: 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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