Accounting

Fair Value Measurements: Valuation Principles and Auditing Techniques (Portfolio 5127)

  • Bloomberg Tax Portfolio 5127-2nd, Fair Value Measurement: Valuation Principles and Auditing Techniques, is a comprehensive examination of the use of fair value measurements in financial reporting. It specifically discusses how reporting entities use fair value measurement to report assets and liabilities.

Description

Bloomberg Tax Portfolio 5127-2nd, Fair Value Measurement: Valuation Principles and Auditing Techniques, is a comprehensive examination of the use of fair value measurements in financial reporting. It specifically discusses how reporting entities use fair value measurement to report assets and liabilities.

For a considerable time, standard setters (i.e., the Financial Accounting Standards Board, or FASB, and its predecessors) have either permitted or required reporting entities to use fair value measurements in specific instances, as the concept of fair value measurements is found throughout the professional literature. This literature, however, had not produced a comprehensive set of principles for defining and implementing fair value measurements. To remedy this gap, in September 2006, the FASB issued principle-based guidance in the form of FASB Statement No. 157, Fair Value Measurements, which has been codified in FASB Accounting Standards Codification (ASC) Topic 820-10. ASC 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The FASB’s rationale for creating these fair value measurement principles was to create consistency among reporting entities that use fair value measurements and to improve the reliability of those measurements.

This Portfolio defines fair values, explains the instances in which they are used in financial reporting, and illustrates their application to assets and liabilities in the context of the fair value measurement principles. This Portfolio also explains the markets in which reporting entities conduct transactions that are subject to fair value measurements. FAS 157 introduced the concept of a fair value hierarchy into the professional literature to help reporting entities determine which types of estimates (i.e., inputs) to use to compute the most reliable fair value measurements. The fair value hierarchy prioritizes the inputs to the valuation process. Under this hierarchy, Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable by third parties for the asset or the liability. Level 3 inputs are created by reporting entities to estimate a fair value of the asset or liability, and thus are unobservable by third parties.

This Portfolio also details the valuation techniques that use the inputs from the hierarchy: the market approach, the income approach, and the cost approach. The market approach relies on observable market prices and uses valuation multiples and multiple regression. The income approach employs a discounted cash flow methodology. The cost approach estimates replacement costs.

Finally, this Portfolio discusses how auditors should audit fair value measurements. The primary guidance in this area is AICPA Statement on Auditing Standards No. 101, Auditing Fair Value Measurements and Disclosures, published by the AICPA’s Auditing Standards Board in 2003.

This Portfolio may be cited as Bloomberg Tax Portfolio 5127-2nd, Ketz and Zyla, Fair Value Measurement: Valuation Principles and Auditing Techniques (Accounting Policy and Practice Series).

Table of Contents

I. Overview of FASB’s Fair Value Project
II. Accounting Measurement Theory
III. Present Values and Pricing Models
IV. Valuation Fundamentals Under FAS 157
V. Evolution of the Standard on Fair Value Measurements
VI. Auditing Fair Value Measures: Working With a Valuation Specialist

Lisa_Starczewski
Lisa Starczewski
Shareholder
Buchanan Ingersoll & Rooney PC