I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
the definition of Fair value
- Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market (or most advantageous market in the absence of a principal market) at the measurement date under market conditions. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows: Market Net Price = Quated Price – Transaction Costs.
- Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability. For example, a company that purchases real estate zoned for recreational use would be considered a market participant,
- Fair value is measured for a specific asset/liability or a group of assets/liabilities. Fair value is a market-based measure, not an entity-based measure. For example, a company may apply fair value to financial instruments on an instrument-by-instrument basis, but once elected, fair value measurement will be used until the asset/liability is disposed
the fair value of the stock
If there is no principal market, then the price in the most advantageous market is the fair value of the stock. The most advantageous market is the market with the best price after considering transaction costs.
the fair value of an equity investment
- The most appropriate fair value to use in the case of an equity investment traded in an active market is the quoted price for an identical investment.
- The present value of cash flows model is not appropriate for valuing a stock that has an actively traded market and a quote for an identical investment.
the classification of fair value into Levels 1 to 3
- Level 1: Represents the most objective and transparent measure of fair value, based directly on observable market prices in active markets for identical (or very similar) assets or liabilities. For example, the closing stock prices on major stock exchanges.
- Level 2: Involves assets or liabilities for which direct market prices are not observable, but whose fair value can be estimated based on observable market data. This includes prices for similar (but not identical) assets or liabilities, market-derived interest rates, and other observable inputs.
- Level 3: Pertains to assets or liabilities that lack observable market data, either directly or indirectly, hence fair value estimations primarily rely on non-market-based inputs. These inputs often stem from valuation models or methodologies based on management’s assumptions.
Adjusting Subsequent Events
- If new information is obtained after the balance sheet date about unresolved events that significantly impact the company, such as litigation costs becoming finalized, this information is treated as an adjusting subsequent event. If there is a difference between the estimated costs recorded at the balance sheet date and the actual finalized amount, this difference must be adjusted and reflected in the financial statements.
Evaluation of Land
Regardless of the intent of use (as part of PP&E or held as an investment) it is principally recorded at historical cost under US GAAP
Evaluation of Money market funds
They reported as cash equivalents are an example of financial instruments and therefore valued at fair value.
