Fair Value

768 Words4 Pages
Case analysis: Classification of instruments in fair value hierarchy Instrumental 1 In the case, there was a significant decrease in the volume and activity for the instrument because of (1) significant widening of the bid-ask spreads in the markets and the widening continued throughout Q4 2012 (2) a significant decrease in the volume of trades comparing with historical level in Q4 (3) no recent transactions. According to 820-10-35-54-c, it was reasonable to determine that market is not active. Because the adjustments were based on management’s assumption, FFC didn’t used level 1 inputs in the income approach valuation technique (present value technique). In addition, significant adjustment inputs includes credit adjustment (level 3…show more content…
Then, FFC changed its valuation technique from market approach to income approach (discounted cash flow model). Most relevant inputs in this model were level 3 inputs, because they were estimations and assumptions that were not market based. In other words, such inputs were not observable. So, FFC should classify the ARSs into level 3 of the fair value hierarchy in the fourth quarter. Instrument 4 There were no quoted prices available for X’ stock, so the measurement did not belong to level 1 of the Fair Value Hierarchy. In addition, because Most of X’s competitors are either privately held or subsidiaries of larger publicly traded clothing retailers and the shares of the two similar two companies are thinly traded in an observable market, the market is inactive. FFC also needed some significant assumptions to forecast its cash flows. These assumptions were level 3 inputs in accordance with ASC 820-10-55-e. In the case, FFC should use the multiple techniques and weight more market approach than income approach, because (1) general valuation principle is maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs (2) sufficient data could be used to support both the approaches (3) market participants used multiple techniques to invest similar stock. So, under ASC 820-10-35-37A, FFC should category the investment into level 3 of the fair value hierarchy, in which the lowest level significant inputs are.
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