Follow-Up Discussion

Expand upon any of the points identified by your classmates and/or ask for clarification on points that you do not understand.

Here is a classmates response to this question that we are to follow up on:

Question:

Discussion Preparation

Find and read Statement on Financial Accounting Standards (SFAS) No. 157.

Initial Discussion

In approximately 300 words, prepare a short summary of the key points from Statement No. 157 as it relates to what we have learned on consolidated financial statements.

Here is the classmates answer:

Re:Module 2 DQ 1

The purpose of SFAS No. 157 is to define fair value and establish a framework for measuring fair value in generally accepted accounting principles and to expand disclosures about fair value measurements (ASC 820). In laymens terms, the fair value of an asset is the price one would receive as payment for an asset at the date of measurement (ASC 820-10-20). Fair value is measured using either market, income, or cost approach. The market approach uses prices for similar assets or liabilities generated by market transactions. The cost approach is based on the amount required to replace the asset currently. The income approach converts future amounts to a single current amount (ASC 820-10-55). Present value calculations are commonly used in the income approach as well as other formulas. Using present value techniques in conditions of uncertainty result in a certain amount of risk because cash flows are estimates rather than known amounts. Therefore, a risk premium should be included in a fair value measurement based on the amount the market would demand as compensation.

FASB also initiated a hierarchy that prioritizes and compares assets that are measured using different inputs. Level 1, which is the most desirable, uses quoted market price in active markets for identical assets (Fair value accounting is alive and well, 2011). Level 2 uses observable inputs, such as quoted prices for similar assets or liabilities, and Level 3 (least desirable), uses unobservable inputs based on the entitys assumptions (Fair value accounting is alive and well, 2011).

SFAS 157 requires disclosure as to how companies value the assets and liabilities, and the types of inputs used in their financial statements filed with the Securities Exchange Commission. For assets and liabilities held at the end of a reporting period, measured at fair value on a recurring basis, the amounts of any transfers between Level 1 and Level 2 must be disclosed. Also required is the reason for the transfers and the entitys policy for determining when transfers have occurred. Transfers into each level are disclosed separately for transfers out (ASC 820-10-50).

Fair value accounting is alive and well. (2011, September 19). Retrieved from Seeking Alpha: https://seekingalpha.com/article/294404-fair-value-accounting-is-alive-and-well

FASB (Financial Accounting Standards Board). (n.d.). Accounting Standards Codification (ASC). Retrieved July 8, 2017 from FASB Accounting Standards Codification database.