Description

Fair Value Measurements: Valuation Principles and Auditing Techniques, written by J. Edward Ketz and Mark L. Zyla, is a comprehensive examination of the use of fair value measurements in financial reporting. It specifically discusses how reporting entities use fair value measurements to report assets and liabilities. 

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 principles contained in FAS 157. This Portfolio also explains the markets in which reporting entities conduct transactions that are subject to fair value measurements.

Fair Value Measurements: Valuation Principles and Auditing Techniques reviews valuation fundamentals—including the fair value premise, the fair value hierarchy, and the unit-of-account issue—and details three valuation techniques that use the inputs from the hierarchy:  

• the market approach, which relies on observable market prices and uses valuation multiples and multiple regression,
• the income approach, which employs a discounted cash flow methodology, and
• the cost approach, which estimates replacement costs. 

In addition, 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.

Fair Value Measurements: Valuation Principles and Auditing Techniques allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios.

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Table of Contents

Detailed Analysis

I. Overview of FASB's Fair Value Project

Introductory Material

A. Introduction

1. Examples of Fair Values in CAP Promulgations

a. Valuation of Intangibles

b. Lower-of-Cost-or-Market Rule

c. Business Combinations

2. Examples of Fair Values in APB Promulgations

a. Business Combinations

b. Nonmonetary Exchanges

3. Examples of Fair Values in FASB Promulgations

a. Troubled Debt Restructuring

b. Issues Concerning the Broadcasting Industry

c. Issues Concerning the Banking Industry

d. Issues Concerning the Real Estate Industry

e. Pension Accounting

f. Accounting for Postretirement Benefits Other Than Pensions

g. Disclosures About the Fair Value of Financial Instruments

h. Accounting for Debt and Equity Investments

i. Accounting for Contributions

j. Accounting for Derivatives

k. Valuation of Assets and Liabilities Through a Business Combination When Accounting for Them Under the Purchase Method

l. Use of Present Value Techniques to Approximate Fair Values

m. Amendments Dealing With Financial Instruments and the Servicing of Financial Assets

n. Fair Value Option for Financial Assets and Liabilities

4. Need for Clarification of Fair Value Measurements

5. The Purpose of This Portfolio

B. Overview of the Statement on Fair Value Measurements

1. Definition of Fair Value

2. The Aggregation Problem

3. Estimating Fair Values

4. The Fair Value Hierarchy

5. Present Values and Fair Values

C. Fair Value Measurements Within the FASB Conceptual Framework

1. Objectives of Financial Reporting

2. Qualitative Characteristics

3. Elements and Their Recognition

4. Measurement of the Elements

D. Summary and Conclusion

II. Accounting Measurement Theory

A. Introduction

B. Accounting Measurement in an Ideal World

1. What is Meant by an Ideal World?

2. Asset Valuation and Income Determination Under Certainty

3. Asset Valuation and Income Determination Under Uncertainty

4. Valuation in an Ideal World Versus Valuation in the Real World

C. Accounting Measurement in the Real World

1. Introduction

2. Three Valuation Systems

a. Historical Cost

b. Current Entry Value

c. Current Exit Value

d. Summary of the Accounting Valuation Systems

3. Adjusting for the Effects of Inflation

a. Inflation Adjustments to Balance Sheet Items

b. Inflation Adjustments to Income Statement Items

c. Example: Financial Statements Adjusted for the Effects of Inflation

d. Summary of Constant Dollar Reports

4. Official Literature

D. Summary and Conclusion

III. Present Values and Pricing Models

A. Introduction

B. Present Value as a Proxy for Market Prices

C. Present Values in the Professional Literature

1. How Present Values May Not Mimic Market Prices

2. Convergence of the Present Value and the Market Price

3. Examples in the Professional Literature

a. Present Values That Do Not Approximate Market Values

(1) Interest Amortization

(2) Leased Assets and Obligations

(3) Impairment of a Loan

b. Present Values That Do Proxy Market Values

(1) Imputation of Interest

(2) Receivables and Payables Assumed in a Business Combination

(3) Impairments of Long-Lived Assets

(4) Interest Rate Swaps

(5) Asset Retirement Obligations

(6) Summary of Examples

D. Risk and Uncertainty

1. FASB's Comments About Risk and Uncertainty

2. The Markowitz Model

a. Risk and Return for a Single Asset

b. Risk and Return for a Two-Asset Portfolio

c. Risk and Return for a Portfolio With a Risk-Free Asset

3. The Capital Asset Pricing Model

4. Finding Beta in Practice

5. Valuation of Uncertain Assets With the CAPM

6. Shortcomings of the CAPM

E. FASB's Two Present Value Approaches

1. One-Period Risk-Free Cash Flow

2. One-Period Risky Cash Flow

3. Multiperiod Risk-Free Cash Flows

4. Multiperiod Risky Cash Flows

F. Liabilities and Creditworthiness

G. Summary and Conclusions

IV. Valuation Fundamentals Under FAS 157

A. Introduction

B. Fair Value Premise

1. Application to Assets

2. Application to Liabilities

3. Fair Value at Initial Recognition

C. Valuation Techniques, the Fair Value Hierarchy, and Disclosures

1. Valuation Techniques

2. Fair Value Hierarchy

3. Fair Value Measurement Disclosures

D. The Unit-of-Account Issue (The Aggregation Problem)

E. The Market Approach: Adjustments to Quoted Prices

1. Restricted Securities: Lack of Control and Lack of Marketability Discounts

2. Empirical Studies Into Lack of Marketability Discounts

F. The Market Approach: Multiples and Regression Analysis

1. Valuation Multiples

2. Multiple Regression

G. The Income Approach: The DCF Model

1. DCF of a Business Enterprise

2. Valuing Intangibles Under the Income Approach

a. Before and After DCF (Valuing a Noncompete Agreement)

b. Relief-From-Royalty Method (Valuing a Trade Name)

c. Multiperiod Excess Earnings (Valuing Technology and IPR& D)

H. The Income Approach: Forwards and Options

1. Forwards

2. Options

I. The Cost Approach

J. Applying FAS 157 in Inactive Markets

K. Summary and Conclusion

V. Evolution of the Standard on Fair Value Measurements

A. Introduction

B. Scope Restrictions

C. Comments on the Exposure Draft and FASB Revisions

1. Definition of Fair Value

2. Valuation Techniques (Present Value)

3. Active Markets

4. Valuation Premise

5. Fair Value Hierarchy

6. Level 1 Reference Market

7. Pricing in Active Dealer Markets

8. Measurement of Blocks

9. Level 3 Estimates

10. Restricted Securities

11. Fair Value Disclosures

12. Other Issues

a. EITF Issue 02-3 and FAS 133

b. Marking to One's Own Credit Standing

c. Reliability of Fair Values

D. Summary and Conclusion

VI. Auditing Fair Value Measures: Working With a Valuation Specialist

A. Introduction

B. Auditing Fair Value Measurements

C. Why Is Auditing Fair Value Measurements Unique?

1. Setting the Context for Auditing Fair Value Measurements

2. AICPA Statement on Auditing Standards 101

3. Fair Value Hierarchy

4. Planning the Audit of Fair Value Measurements

D. Understanding Fair Value Measurements From the Viewpoint of a Valuation Specialist

1. Definition of Fair Value

2. Marketplace Participants

3. Identification of Specific Assets to Be Valued

4. Valuation Approaches

5. Amortization of Intangible Assets

E. Conclusion

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Glossary

Worksheet 2 Relevant FASB Pronouncements

Worksheet 3 Relevant CAP and APB Pronouncements

Worksheet 4 Relevant SEC and AICPA Pronouncements

Worksheet 5 Issues for Public Comment in the Exposure Draft on Fair Value Measurements

Worksheet 6 SEC "Dear CFO" Letter to Public Companies on MD& A Disclosure Regarding the Application of FAS 157 (Mar. 2008)

Worksheet 7 SEC "Dear CFO" Letter to Public Companies on MD& A Disclosure Regarding the Application of FAS 157 (Sept. 2008)

Worksheet 8 FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active

Bibliography

OFFICIAL

SECURITIES AND EXCHANGE COMMISSION:

INTERNAL REVENUE SERVICE:

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS:

AICPA Accounting Research Bulletins

AICPA Statements on Auditing Standards

AICPA Statements of Position

ACCOUNTING PRINCIPLES BOARD:

APB Opinions

APB Statements

EMERGING ISSUES TASK FORCE:

EITF Issues

FINANCIAL ACCOUNTING STANDARDS BOARD:

FASB Concepts Statements

FASB Interpretations

FASB Staff Positions

FASB Statements of Financial Accounting Standards

FASB Working and Exposure Drafts

UNOFFICIAL

Authors