David Hong

Luis Perez
Nick Teng
Randy Tsang
Group Paper Outline
1. Introduction
a. Overview of GAAP, IFRS, FASB, IASB
b. Briefly talk about fair value accounting (Financial Accounting Topic)
2. Fair value accounting
a. What is fair value
- Fair value is the price market participants receive when they sell an asset or pay to
transfer a liability in a transaction
- Transaction takes place in the principal market of the asset or liability meaning it takes
place in the market that will produce the greatest volume and level of activity for the
asset or liability
b. Market Participants
- Who are they?
- Buyers and sellers in the principal market that are independent of the reporting entity,
have a reasonable knowledge about the asset or liability and the transaction based on all
available information, able and willing to transact (carry out the action) for the asset or
liability
c. How fair value affects assets and liability
- Assumes highest and best use of the asset by market participants with consideration that
asset physically possible, legally permissible, and financially feasible at measurement
date
- Highest and best use of asset is in-use and in-exchange
- Fair value of the liability reflects on the nonperformance risk relating to that liability
d. How fair value is recognized
- Entry price and exit price
- Factors affecting initial recognition such as related parties, under duress or the seller is
forced, unit of account represented by transaction price is different from the unit of
account, the market, etc.
3. History of Fair Value
a. When was it first used
b. Hicksian income measure, how it influenced fair value
- Hicksians concept of income, distinction of income ex-ante and income ex-post, etc.

c. Fair value Controversy

- Wall Street Crash in 1929, financial crisis 2008
4. Valuation Methods
a. Market approach
- What is it?
- Determines the fair market value of a company by using values measured based on prices
of publicly traded stocks and actual price transactions from purchases and sales of the
company in their industry or similar industries

b. Income approach
- Measurement based on the value indicated by the current market expectations about the
future amounts
- Allows investors to estimate value of the property based on the income produced

c. Cost approach
- Based on the amount that currently would be required to replace the service capacity of
an asset
5. Fair value hierarchy
a. Level 1 inputs
-What is level inputs, how is it determined, when will fair value be measured within level 1
b. Level 2 Inputs
- What items are included in level 2, how it is evaluated, what factors come into play
c. Level 3 Inputs
6. Pros and Cons of Fair Value
a. Advantages
- More accurate numbers, reflects current market value, more objective, transparency

b. Disadvantages
- Marketed down to reflect change, market changes frequently, more difficult to forecast
earnings
7. GAAP Fair Value & IFRS Fair Value
a.
-

Similarities
Assessment of fair value for assets and liabilities
Income approach
Cost approach

Accrual accounting
Materiality and consistency
Fair Value Hierarchy

b.
-

Differences
Recognition of day one gains and losses
Accounting for alternative investments
disclosures
different assets, liabilities, and equity measured at fair value
different accounting requirements

8. Fair Value future development

a. GASB Statement No. 72
- Determines how state and local governments should define and measure fair
value , which assets and liabilities should be measured at fair value
b. FASB & IASB fair value measurement joint project
- Project objective ensures fair value has the same meaning in GAAP and IFRS
- Updates to Fair Value Measure (Topic 820) such as Extraordinary and Unusual
items
- Update eliminates concept of extraordinary items from GAAP, board believes
eliminating the concept saves time and reduces cost for preparers, reduces
uncertainty for auditors, regulators and many more

http://www.fasb.org/cs/BlobServer?
blobkey=id&blobwhere=1175823288587&blobheader=application/pdf&blobcol=url
data&blobtable=MungoBlobs
http://www.fasb.org/summary/stsum157.shtml
http://www.divestopedia.com/definition/1027/market-approach
http://www.siliconeconomics.com/historical.shtml
https://hbr.org/2013/03/why-fair-value-is-the-rule
http://www.investopedia.com/ask/answers/021615/why-are-fair-value-accountingrules-controversial.asp
http://www.usc.edu/org/InsightBusiness/ib/articles/articlescontent/08_4_Nishan
%20Perera.html
http://www.pwc.com/en_US/us/cfodirect/assets/pdf/accountingguides/pwc_fair_value_2013.pdf