Discuss where judgment needs to be applied in the residual value and relative fair value methods.

Question

Quizplus · Accepted Answer

The Answer is It is a matter of professional judgment how one chooses the order of the residual value allocation and how one chooses between the relative fair value method and the residual fair value method.
That judgment should take into consideration the reliability of the fair value estimates. If the fair values of all the components were measured with about the same degree of reliability or accuracy, then it would make more sense to apply the relative fair value method.
On the other hand, big differences in the reliability of the measurements suggests that it would make sense to first allocate the price to those components that are measured with the greatest reliability, with the least reliably measured component taking the remaining unallocated value.

Discuss Where Judgment Needs to Be Applied in the Residual