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

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asis for determining which of those prices are the most advantageous at the measurement date. The Board agreed that its intent was not to require that entities continuously search across all possible markets in which transactions for the related asset or liability can be observed for the most advantageous price for the asset or liability. To convey its intent more clearly, the Board clarified its view that generally the principal market for an asset or liability (the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability) will represent the most advantageous market for the asset or liability. Accordingly, this Statement specifies that if there is a principal market for the asset or liability (determined under ASR 118 or otherwise), the fair value measurement should represent the price in that market (whether observable or otherwise determined using a valuation technique), even if the price in a different market is potentially more advantageous at the measurement date. C29. Some respondents further indicated that to achieve consistency in applying the fair value measurement objective in this Statement, the principal (or most advantageous) market approach should not be limited to Level 1; it is a general principle that should apply broadly. The Board agreed and decided to expand the principal (or most advantageous) market approach so that it applies broadly. The Board observed that because different entities (and operating units within those entities) with different activities transact in different markets, the principal (or most advantageous) market for the same asset or liability might be different for different entities. Because financial reporting is from the perspective of the reporting entity, the Board determined that an exit price should be determined based on the interaction of market participants (buyers and sellers) in the principal (or most advantageous) market considered from the perspective of the reporting entity, thereby allowing for differences between and among entities. C30. The Board affirmed that the price in the principal (or most advantageous) market used to measure the fair value of an asset or liability should not be adjusted for transaction costs. Transaction costs refer to the incremental direct costs to transact in the principal (or most advantageous) market for the asset or liability, similar to cost to sell as defined in paragraph 35 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and may differ, depending on how the reporting entity transacts. In other words, transaction costs are not an attribute of an asset or liability. C31. In response to related issues raised by some respondents, the Board clarified that transaction costs are different from transportation costs, that is, the costs that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market. This Statement clarifies that if location is an attribute of the asset 56
or liability (for example, a commodity), the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability should be adjusted for those costs. Market Participants C32. This Statement emphasizes that a fair value measurement is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants—buyers and sellers in the principal (or most advantageous) market for the asset or liability—would use in pricing the asset or liability. Paragraph 26 of Concepts Statement 7 explains: Among their many functions, markets are systems that transmit information in the form of prices. Marketplace participants attribute prices to assets and, in doing so, distinguish the risks and rewards of one asset from those of another. Stated differently, the market’s pricing mechanism ensures that unlike things do not appear alike and that like things do not appear to be different (a qualitative characteristic of accounting information). An observed market price encompasses the consensus view of all marketplace participants about an asset or liability’s utility, future cash flows, the uncertainties surrounding those cash flows, and the amount that marketplace participants demand for bearing those uncertainties. C33. To convey more clearly the idea of a measurement that is made from the perspective of market participants, this Statement clarifies the “willing parties” referred to in earlier definitions of fair value in the context of market participants, referring to buyers and sellers in the principal (or most advantageous) market for the asset or liability that are independent of the reporting entity (unrelated), knowledgeable, and both able and willing to transact. C34. In that context, some respondents questioned the extent to which market participants would be expected to be knowledgeable, referring to markets that are characterized by information asymmetry, where some market participants have information about an asset or liability that is not available to other market participants. The Board agreed that it would be reasonable to presume that a market participant that is both able and willing to transact for the asset or liability would undertake efforts necessary to become sufficiently knowledgeable about the asset or liability based on available information, including information obtained through usual and customary due diligence efforts, and would factor any related risk into the fair value measurement. 57
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Financial Accounting Series NO. 284
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Summary This Statement defines fair
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(blockage factor). This Statement e
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instruments as of the beginning of
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Copyright © 2006 by Financial Acco
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Statement of Financial Accounting S
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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 40 and 41: the one- and two-year options on th
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: clearly, the Board revised the defi
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
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Page 89 and 90: asset or liability. The Board concl
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Page 95 and 96: adjustment to the opening balance o
Page 97: International Financial Reporting S
Page 100 and 101: Pronouncement Statement 65* Stateme
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Page 104 and 105: Pronouncement FSP AAG INV-1 and SOP
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Page 110 and 111: E6. FASB Statement No. 19, Financia
Page 112 and 113: . Paragraph 8: Broadcasters may bar
Page 114 and 115: cost or marketfair value for each t
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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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