I need two replies. Put a question on the end of each reply. 150 words each
The financial Accounting standards No 157 deals with fair value and ensuring that their are no inconsistencies. The new improved financial reporting should “result in increased consistency and comparability in fair value measurements” It measures assets and Liabilities and gives people a better understanding of fair value. The numbers that are inputted are used as measurements which are the changes in assets for a specific time period. Financial statements should be applied at the beginning of the fiscal year. If there are any changes that need to be made should be made at the beginning of the fiscal year. When creating the statements and making the adjustments the difference is carried out and adjusted from the opening balance of retained earnings. When making corrections it is important that the assets or the liabilities balance each other. One is done to one side should be done to the other side.
Market approach, income approach, and cost approach are all techniques that are included in the Financial Accounting standards non 157. These are three different ways using assets and liabilities using future value as well as a certain value on the item.
The SFAS No. 157 was issued in September of 2006 to, “define fair value, establish a framework for measuring fair value in generally accepted accounting principles (GAAP), and expand disclosures about fair value measurements”.
SFAS 157 provides the definition of fair value as, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Further guidance in that determination is done with orderly transactions, assuming a principle market and market participants as well as with highest and best use. That all means, in short, that the fair value is determined assuming that the item had exposure to the market and marketing activities in a usual or customary way or in a way that is most advantageous for determining value.
There are 3 valuation techniques included in STFS no. 157. They are, the market approach, the income approach, and the cost approach. The market approach uses identical or comparable assets (liabilities) in order to assign value. The income approach uses the value of future cash flows or earnings to place value on the asset. The cost approach bases its valuation on the replacement and/or service capacity of an asset.
There are also 3 levels of hierarchy in determining fair value. Level one refers to unadjusted, quoted prices for the same assets (liabilities) in the market. Level two relies on inputs included in level 2, but allows for values of similar assets or those in other markets. Level three allows for the use of inputs that are not observable. This means that if there are no comparable assets or there is no market activity to compare to.
When you are consolidating financial statements it is important that the valuations of assets or liabilities are done the same. If as asset for a firm is assessed value based on income and the other firm bases theirs on the cost approach, you will not be able to accurately compare.