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Chapter 2: 18Q (page 61)

Briefly describe the fair value hierarchy.

Short Answer

Expert verified

The fair value hierarchy differentiates the assets and liabilities that are traded in an active market from those that do not.

Step by step solution

01

Introduction to fair value

The International Accounting Standards Boardcharacterizesfair valueas the price received to sell an asset or in an orderly transaction paid to transfer a liability among market participants on a specific date, generally for utilization on financial statements over time.

02

Describing the fair value hierarchy

The inputs used in valuation methodologies are organized into three levels using the fair value hierarchy. The hierarchy provides (un-adjusted) supplied prices in active markets for comparable assets or liabilities the greatest priority (Level 1), and unobservant inputs are given the lowest priority (Level 3).

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Most popular questions from this chapter

Identify which basic assumption of accounting is best described in each item below.

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b)Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation.

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d)The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes.

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

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Question: An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria.Instructions

  1. Explain the rationale for recognizing costs as expenses at the time of product sale.
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  3. In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense?
  4. Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on the basis of systematic and rational allocation of asset cost.
  5. Identify the conditions under which it would be appropriate to treat a cost as a loss.

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?
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