[Boruch]

Using Roger for FAR now (not happy with them at all, fwiw) and am stuck with this “measurement” thing. It’s so confusing! Every topic introduces another type of measurement but I’m supposed to take a leap of faith and believe they are somehow not different.

The worst is fair value. I’m supposed to look at what is the principal or advantageous market, but after that I can decided to use a “cost approach” or “income approach” to evaluate (what?!!!) which literally are replacement and present value, respectively – not fair value.

Anyone to clear that up for me? Thanks in advance.

[Anonymous]

Hi, Boruch-it is fair value-“fair value measurement techniques”. There are 3 different levels-one is comparing identical assets on an exchange-i.e. stock price-the most “for sure” way of valuing something. Level 2 is comparing similar products in a public market or identical in a market that doesn't trade. That level of measurement is ok but not great, and another one is Level 3-that's when you are investing in a private company and you have ways of valuing your investment but it's very subject-there are 3 approaches-you can use a multiple of EBITDA or other revenue multiples or you could discount cash flows, but that's very subjective, and based on unobservable inputs and therefore the most unreliable way of valuing an asset.

[Boruch]

thanks for your reply!

I'm actually referring to the Roger book which uses the words “three valuation techniques”. It says(page 1-9), “when measuring an item at fair value, the entity will apply one of three valuation techniques, the market approach, the income approach, or the cost approach (MIC).” It goes on to discuss input levels in the next paragraph.

This is the sentence that's giving me a headache.. Why would I look for an advantageous market and then do a present value or replacement cost evaluation? Makes no sense.

Thanks again!

[Anonymous]

I think for Level 1 and maybe 2 you would use the most advantageous market but for Level 3 you would use income, cost or market approach to ascertain the fair value, as there is no market to compare these assets in. that's how I understand it. Usually when the talk about the most advantageous markets they are talking about stocks trading at an exchange, which isn't the case for Level 3 investments. Sorry, I am not familiar with Roger, so could only give my input from what I know on the subject.

[Boruch]

I think I'm understanding you, just one point about what you're saying on level 3, how does using a “cost” approach provide the “fair value” of something? isn't the idea of “fair value”, market value? replacement cost is a measurement method in and of itself, no? Once I use a cost approach I'm essentially not using fair value – or so it seems to me and I'm obviously getting something wrong..lol

thanks a lot!

[Anonymous]

It's a way to measure fair value. From Becker “The cost approach uses current replacement cost to measure the fair value” I think you are overthinking it. Just know these are the 3 techniques to measure fair value, that's all you need to know for the test:) LOL

[Author]

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