Question 1

When measuring the fair value of a liability, which of the following is assumed?
A) the liability is settled by the holder;
B) the liability will be settled by the market participant;
C) the liability will not be settled;
D) the liability is settled with the counterparty on measurement date.

Accepted Answer

When measuring the fair value of a liability, it is assumed that the liability will be settled by the market participant. This means that the fair value should reflect the amount that would be paid to transfer the liability to another market participant, rather than assuming that the liability will be settled by the holder or with the counterparty on the measurement date. The assumption of market participant settlement is also consistent with the objective of fair value measurement, which is to provide the most relevant information for decision-making in the market.

Question 2

An entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as: 
I they hold a net long position
II they hold a net short position
III they have a documented risk management strategy
IV the manage the group of net financial assets and liabilities on a net exposure basis
v. transactions are conducted in an orderly market
A) I and III;
B) II and IV;
C) III and IV;
D) II and V.

Accepted Answer

The statement is only true if the entity holds a net position, has a documented risk management strategy, and manages the group of net financial assets and liabilities on a net exposure basis. Therefore, options I and II are incorrect. Option V is not relevant to determining fair value on the net position. Choice C includes the two required conditions for fair value netting.

Question 3

Which of the following is the definition of fair value per IFRS 13?
A) The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction;
B) The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
C) The price that would be received to sell an asset or paid to transfer a liability;
D) A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (eg a forced liquidation or distress sale).

Accepted Answer

Fair value per IFRS 13 is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition emphasizes the assumptions of an orderly transaction, between market participants, and at the measurement date, which distinguishes it from other definitions of values such as historical cost or replacement cost.

Question 4

Valuation techniques that convert future amounts to a single current amount and determines the fair value on the basis of the value indicated by current market expectations about those future amounts is an example of:
A) the fair value approach;
B) the income approach;
C) the cost approach;
D) the market approach.

Accepted Answer

The income approach is a valuation technique that converts future amounts (such as cash flows or earnings) to a single present amount (discounted). It determines the fair value based on the value indicated by current market expectations about those future amounts, typically using discounted cash flow analysis or other methods that adjust for the time value of money.

Question 5

Which of the following documents issued alongside IFRS 13 do not form an integral part of the standard? 
I Basis for Conclusions
II Illustrative Examples
III Appendix A: Defined terms
IV Appendix B: Application guidance
A) I and II;
B) II and III;
C) III and IV;
D) I and IV.

Accepted Answer

The Basis for Conclusions and Illustrative Examples issued alongside IFRS 13 do not form an integral part of the standard. These documents provide additional context and examples to help understand and implement the standard but are not mandatory components of the standard itself.

Question 6

At which date is fair value determined?
A) the measurement date;
B) the settlement date;
C) the transaction date;
D) the exchange date.

Accepted Answer

Fair value is usually determined on the measurement date, which is the date when an asset or liability's fair value is measured or estimated for accounting purposes. This may be the end of the reporting period or another specified date. Fair value may also be determined on the transaction date if the transaction is being used as an indirect indicator of fair value, but this is not always the case. Settlement date and exchange date are more related to the execution of a transaction, not the determination of fair value.

Question 7

When determining the fair value of an asset its fair value is based on its:
A) Current use;
B) Proposed use;
C) Highest and best use;
D) Value in use.

Accepted Answer

The fair value of an asset is based on its highest and best use, which is the most profitable use that the asset could be put to, given the market and legal conditions. Current use, proposed use, and value in use are all relevant factors, but they are not as important as highest and best use when determining fair value.

Question 8

In which circumstance will it be necessary to determine the fair value of an entity's own equity instruments?
A) where the entity is preparing for listing;
B) where the entity undertakes a business combination and issues its own equity instruments in exchange for a business;
C) where the entity undertakes a share buy-back;
D) where there is a change in the shareholding of the entity.

Accepted Answer

In a business combination where an entity issues its own equity instruments as consideration, it is necessary to determine the fair value of those equity instruments to accurately record the cost of the acquisition.

Question 9

Which of the following steps in not relevant when valuing liabilities?
A) the particular liability that is the subject of the measurement;
B) the valuation premise that is appropriate for the measurement;
C) the principal (or most advantageous) market for the liability;
D) 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 when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

Accepted Answer

The answer of Which of the following steps in not...

Question 10

Which of the following is not a valuation technique prescribed by IFRS 13?
A) the fair value approach;
B) the income approach;
C) the cost approach;
D) the market approach.

Accepted Answer

IFRS 13 prescribes three valuation techniques: the income approach, the cost approach, and the market approach. The "fair value approach" is not a separate valuation technique under IFRS 13; rather, fair value is the objective that these techniques aim to measure.

Question 11

Which of the following is not assumed when measuring the fair value of an equity instrument?
A) The market participant transferee will take on the rights and responsibilities associated with the instrument;
B) An entity's own equity instruments are transferred to a market participant at transfer date;
C) An entity's own equity instrument would remain outstanding;
D) The instrument would not be cancelled or otherwise extinguished on the measurement date.

Accepted Answer

The fair value of an equity instrument is based on assumptions that the instrument would remain outstanding, it would not be cancelled or extinguished, and the market participant transferee would take on the rights and responsibilities associated with the instrument. However, it is not assumed that an entity's own equity instruments are transferred to a market participant at the transfer date.

Question 12

Which of the following is not an example of a level 2 input?
A) a financial forecast of cash flow or earnings;
B) quoted prices for identical or similar assets or liabilities in markets that are not active;
C) inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves, volatilities, prepayment speeds, and credit risks;
D) inputs that are derived from or corroborated by observable market data by correlation or other means.

Accepted Answer

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A financial forecast of cash flow or earnings is not considered a Level 2 input because it is typically based on unobservable inputs, making it more aligned with Level 3 inputs.

Question 13

Where a market has both a bid and an ask process, the price used in measuring fair value is:
A) the bid price;
B) the ask price;
C) the bid-ask spread;
D) the most representative price for the transaction.

Accepted Answer

The most representative price for the transaction is used in measuring fair value in a market with both a bid and ask process. This approach ensures that the fair value measurement reflects the price that is most indicative of what market participants would use in a transaction.

Question 14

Trademarks would be measured primarily using which type of inputs?
A) Level 1 inputs;
B) Level 2 inputs;
C) Level 3 inputs;
D) Level 4 inputs.

Accepted Answer

Trademarks are typically valued using Level 3 inputs, which are unobservable inputs for the asset or liability that rely on the entity's own assumptions about what market participants would use in pricing the asset or liability. This is because there is often no observable market data (Level 1) or other directly or indirectly observable inputs (Level 2) for trademarks.

Question 15

Which of the following disclosures are not required under IFRS 13?
A) the valuation techniques used to measure fair value;
B) the inputs used to measure fair value;
C) the level of the fair value hierarchy within which the fair value measurements are categorised;
D) quantitative information about all unobservable inputs used in the fair value measurement.

Accepted Answer

Quantitative information about all unobservable inputs used in the fair value measurement is not required to be disclosed under IFRS 13. However, qualitative information about the nature of the unobservable inputs and how they were developed and applied is required to be disclosed. The remaining options (A, B, and C) are required disclosures under IFRS 13.

Question 16

Unobservable inputs for the asset or liability are an example of:
A) a Level 1 input;
B) a Level 2 input;
C) a Level 3 input;
D) a Level 4 input.

Accepted Answer

Unobservable inputs are also known as Level 3 inputs. Level 1 inputs are quoted prices in active markets, Level 2 inputs are observable market data, and Level 4 inputs do not exist as a recognized level in financial reporting standards.

Question 17

Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by:
A) applying a present value technique to measure the liability;
B) applying the cost approach to valuing the liability;
C) measuring the fair value of the corresponding asset;
D) determining the amount required to settle the present obligation.

Accepted Answer

The fair value of the liability is determined by measuring the fair value of the corresponding asset held by another entity. This is because the fair value of the corresponding asset should reflect the fair value of the liability as they are linked. Using a present value technique or determining the amount required to settle the present obligation may be appropriate in determining the fair value of the liability in other situations, but not when a corresponding asset is held by another entity. The cost approach is not relevant for determining the fair value of liabilities.

Question 18

The market with the greatest volume and level of activity for the asset or liability is defined as the:
A) active market;
B) principal market;
C) liquid market;
D) most advantageous market.

Accepted Answer

The principal market is the market with the greatest volume and level of activity for the asset or liability. This is the market where the price is likely the most representative of fair value and where transactions would occur most frequently. The other options are not as relevant or specific in their definition of the market in question.

Question 19

Which of the following does Whittington (2008) see as a main feature of the fair value view?
A) Stewardship, defined as accountability to present shareholders, is a distinct objective, ranking equally with decision usefulness;
B) Reliability is less important and is better replaced by representational faithfulness, which implies a greater concern for capturing economic substance, and less with statistical accuracy;
C) Present shareholders of the holding company have a special status as users of financial statements;
D) Future cash flows may be endogenous: feedback from shareholders and markets in response to accounting reports may influence management decisions.

Accepted Answer

Whittington (2008) sees representational faithfulness, which implies a greater concern for capturing economic substance, and less with statistical accuracy, as a main feature of the fair value view. Option A is incorrect as Whittington does not rank stewardship equally with decision usefulness. Option C is also incorrect as Whittington does not suggest that present shareholders have a special status as users of financial statements. Option D is incorrect as Whittington's views on feedback from shareholders and markets are not relevant to the main features of fair value accounting.

Question 20

Which of the following is not one of the key reasons given by the IASB for a standard on fair value measurement?
A) to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application;
B) to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly;
C) to require the use of fair value when accounting for all non-financial assets;
D) to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values.

Accepted Answer

The IASB has not stated that a standard on fair value measurement is intended to require the use of fair value when accounting for all non-financial assets. Rather, the standard focuses on providing guidance for fair value measurement for assets and liabilities that are already required or permitted to be measured at fair value under IFRSs.

Quiz 3: Fair Value Measurement

When measuring the fair value of a liability, which of the following is assumed?

Which of the following is the definition of fair value per IFRS 13?

Valuation techniques that convert future amounts to a single current amount and determines the fair value on the basis of the value indicated by current market expectations about those future amounts is an example of:

Which of the following documents issued alongside IFRS 13 do not form an integral part of the standard? I Basis for Conclusions II Illustrative Examples III Appendix A: Defined terms IV Appendix B: Application guidance

At which date is fair value determined?

When determining the fair value of an asset its fair value is based on its:

In which circumstance will it be necessary to determine the fair value of an entity's own equity instruments?

Which of the following steps in not relevant when valuing liabilities?

Which of the following is not a valuation technique prescribed by IFRS 13?

Which of the following is not assumed when measuring the fair value of an equity instrument?

Which of the following is not an example of a level 2 input?

Where a market has both a bid and an ask process, the price used in measuring fair value is:

Trademarks would be measured primarily using which type of inputs?

Which of the following disclosures are not required under IFRS 13?

Unobservable inputs for the asset or liability are an example of:

Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by:

The market with the greatest volume and level of activity for the asset or liability is defined as the:

Which of the following does Whittington (2008) see as a main feature of the fair value view?

Which of the following is not one of the key reasons given by the IASB for a standard on fair value measurement?