What is fair value?

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. Which statement about SFRS 113 Fair Value Measurement is false?

  2. The components of fair value include - I. A current exit price; II. Applies regardless if there is an intention to sell; III. Transaction costs are deducted from the price; IV. Buyers and sellers are independent and knowledgeable about the asset

  3. The concepts of highest and best _____, and valuation _____ are only applicable when determining the fair value of non-financial assets

  4. The following 3 markets exist for the fleet of vehicles of entity A. As of measurement date, the entity has 100 vehicles (same make, model and mileage) that it needs to measure fair value. Volumes and prices in the respective markets are as follows - In Market A, the price is $30,000. Entity A volume for the asset in the market is 60 percent and total market-based volume is 15 percent. In Market B, the price is $25,000, Entity A volume for the asset in the market is 25 percent and total market-based volume is 75 percent. In Market C, the price is $20,000, Entity A volume for the asset in the market is 15 percent and total market-based volume is 10%. Which is the principal market?

  5. The fair value hierarchy classifies inputs used to measure fair value into three levels. Which of the following is an example of Level 2 input?

  6. SFRS 113 Fair Value Measurement does not prioritise the use of valuation ______. However, an entity must ______ the use of observable inputs and ______ the use of unobservable inputs.

  7. There are numerous valuation techniques that can be employed to appraise the fair value of an asset. Which technique is inconsistent with the income approach?

  8. Entity X holds a physical commodity in its warehouse in Malaysia. For this commodity, the London exchange is determined to be the principal market as it represents the market with the greatest volume. The exchange price for this commodity is $25. However, the contracts traded on the exchange require physical delivery to London. It has been estimated that it would cost $5 to transport the physical commodity and the broker’s commission is $1 to transact on the exchange. What is the fair value of this commodity?

  9. On January 20X4, Entity A assumes a decommissioning liability. The entity is required to dismantle an offshore oil platform 3 years later. Management assigns probability assessments to a range of cash flow estimates as follows - Cash flow estimated to be $100,000 and probability is 25 percent; Cash flow estimated to be $125,000 and probability is 50 percent; Cash flow estimated to be $175,000 and probability is 25 percent. The risk-free rate is 3.0 percent and non-performance risk is determined to be 5.0 percent. Estimate the fair value of this liability using the expected present value technique.

  10. An asset is sold in two different markets at different prices. At measurement date, the selling price is $26, transaction costs is $3 and costs to transport is $2 in Market A. Whereas in Market B, the selling price is $25, transaction costs is $1 and costs to transport is $2. Assuming neither market is the principal, identify the most advantageous market.