Fair Value Measurements
SFAS N0. 157, September 2006
“Fair Value Measurements”
“Fair Value Measurements”
Fair Value is
the price an entity would receive when an asset is sold
or
the price an entity would pay when a liability is transferred.
the price an entity would receive when an asset is sold
or
the price an entity would pay when a liability is transferred.
Such transaction should be
an orderly transaction
between market participants
at the measurement date.
an orderly transaction
between market participants
at the measurement date.
Valuation Techniques
Three approaches
1. Market approach
–> based on information from market transactions
2. Income approach
–> based on future income
–> e.g., present value techniques
3. Cost approach
–> based on current replacement cost
1. Market approach
–> based on information from market transactions
2. Income approach
–> based on future income
–> e.g., present value techniques
3. Cost approach
–> based on current replacement cost
Inputs to Valuation Techniques
Three levels of inputs: Fair Value Hierarchy
1. Level 1 inputs
–> unadjusted quoted prices
in active markets
for identical assets or liabilities
1. Level 1 inputs
–> unadjusted quoted prices
in active markets
for identical assets or liabilities
2. Level 2 inputs
–> quoted prices
for similar assets or liabilities
in active markets
–> quoted prices
for identical or similar assets or liabilities
in markets that are not active
–> quoted prices
for similar assets or liabilities
in active markets
–> quoted prices
for identical or similar assets or liabilities
in markets that are not active
3. Level 3 inputs
–> unobservable inputs
for the asset or liability
–> unobservable inputs
for the asset or liability