Before discussing the key steps in determining fair value measure, my focus on fair value accounting rules will remain imperfect if I fail to provide you with an overview of some of the key principles concerned in determining the fair value of an asset or a liability. In fact, fraudulent financial reporting can be done by means of misapplication of an accounting rule, misapplication of a valuation technique, or a combination of both. Most fair value measurements employ one of three approaches to determine fair value: (1). Market approach (2). Income approach and (3). Cost approach.
Key Steps In Determining Fair Value Measure :
For determining the fair value, an entity has to determine:
- the particular asset or liability that is the subject of the measurement (consistent with its unit of account).
- for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use).
- the principal (or most advantageous market) for the asset or liability.
- the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.
Does The Measurement Of Fair Value Take Into Account Transport Costs And Transactions Costs?
Transaction costs are the incremental direct costs to sell an asset or transfer a liability, while transport costs are the costs necessarily incurred to transfer an asset to its most advantageous market.
The measurement of fair value requires both costs to be taken into consideration in the determination of the most advantageous market. However, only transport costs are used in the calculation of the fair value number.
Transaction costs are entity-specific, transport costs are not; they relate to the asset itself.