Principles of Fair Value Accounting
1. Market-Based Valuation: Fair value is determined based on market prices if available. If there is an active market for the asset or liability, the quoted market price is used.
2. Assumptions about Market Participants: Fair value assumes that transactions will occur between willing buyers and willing sellers in an arm’s length transaction.
3. Exit Price Perspective: It is based on the perspective of the selling entity, not the buying entity. This means it considers the price at which the entity could sell the asset, not the price at which it could buy a replacement.
4. Fair Value Hierarchy: The accounting standards provide a hierarchy for determining fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs that are not quoted in active markets but can be corroborated by market data. Level 3 inputs are unobservable inputs that require the company’s own assumptions
5. Market-based Valuation: Fair value is determined based on market prices if available. If there is an active market for the asset or liability, the quoted market price is used.
6. Assumptions about Market Participants: Fair value assumes that transactions will occur between willing buyers and willing sellers in an arm’s length transaction.
7. Exit Price Perspective: It is based on the perspective of the selling entity, not the buying entity. This means it considers the price at which the entity could sell the asset, not the price at which it could buy a replacement.
8. Fair Value Hierarchy: The accounting standards provide a hierarchy for determining fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs that are not quoted in active markets but can be corroborated by market data. Level 3 inputs are unobservable inputs that require the company’s own assumptions.