Chapter 11 Codification Research Case

CODIFICATION RESEARCH CASE (a) According to FASB ASC 360-10-05 (Property, Plant, and Equipment) 05-2 The guidance in the Overall Subtopic is presented in the following two Subsections: a. The General Subsections address the accounting and reporting for property, plant, and equipment, including guidance for accumulated depreciation. b. The Impairment or Disposal of Long-Lived Assets Subsections retain the pervasive guidance for recognizing and measuring the impairment of long-lived assets and for long-lived assets to be disposed of. 05-4 The Impairment of Disposal of Long-Lived Assets Subsections provide guidance for: a. Recognition and measurement or the impairment of longlived assets to be held and used b. Measurement of long-lived assets to be disposed of by sale. (b) When to Test a Long-Lived Asset for Recoverability is addressed in FASB ASC 360-10-35-21: 35-21 11-74 A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: a. A significant decrease in the market price of a long-lived asset (asset group) b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group) CODIFICATION RESEARCH CASE (Continued) e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent. (c) According to FASB ASC 360-10-35-36, For long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value technique will often be the appropriate technique with which to estimate fair value. According to FASB ASC 820-10-35-37 through 43 (Fair Value Hierarchy): 35-37 To increase consistency and comparability in fair value measurements and related disclosures, this Topic establishes a fair value hierarchy that categorizes into three levels (see paragraphs 820-10-35-40 through 35-41, 820-10-35-41B through 35-41C, 820-10-35-44, 820-10-35-46 through 35-51, and 820-1035-52 through 35-54A) the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). 35-37A In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Accessing the significance of a particular input to the entire measurement requires judgment, taking into account factors specific to the asset or liability. Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorized. 11-75 CODIFICATION RESEARCH CASE (Continued) 35-38 The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques (see paragraph 820-10-35-24). However, the fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique might be categorized within Level 2 to Level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorized. 35-38A If an observable input requires an adjustment using an unobservable input and that adjustment results in a significantly higher or lower fair value measurement, the resulting measurement would be categorized within Level 3 of the fair value hierarchy. For example, if a market participant would take into account the effect of a restriction on the sale of an asset when estimating the price for the asset, a reporting entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable input that is significant to the entire measurement, the measurement would be categorized within Level 3 of the fair value hierarchy. 11-76 35-39 The remainder of this guidance is organized as follows: a. Level 1 inputs b. Level 2 inputs c. Level 3 inputs d. Inputs based on bid and ask prices. e. Investments in certain entities that calculate net asset value per share (or its equivalent, for example, member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). 35-40 Superseded CODIFICATION RESEARCH CASE (Continued) 35-36 Valuation techniques used to measure fair value shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs. 35-36A Examples of markets in which inputs might be observable for some assets and liabilities (for example, financial instruments) include exchange markets, dealer markets, brokered markets, and principal-to-principal markets. 35-41 A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified in paragraph 82-10-35-41C. 35-41A Paragraph superseded by Accounting Standards Update No0 2011-04. 35-41B A Level 1 input will be available for many financial assets and financial liabilities, some of which might be exchanged in multiple active markets (for example, on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following: a. The principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability b. Whether the reporting entity can enter into a transaction for the asset or liability at the price in that market for the asset or liability at the measurement date. 35-41C A reporting entity shall not make an adjustment to a Level 1 input except in the following circumstances: a. When a reporting entity holds a large number of similar (but not identical) assets or liabilities (for example, debt securities) that are measured at fair value and a quoted price in an active market is available but not readily accessible for each of those assets or liabilities individually (that is, given the large number of similar assets or liabilities held by the reporting entity, it would be difficult to obtain pricing information for each individual asset or 11-77 liability at the measurement date). In that case, as a CODIFICATION RESEARCH CASE (Continued) practical expedient, a reporting entity may measure fair value using an alternative pricing method that does not rely exclusively on quoted prices (for example, matrix pricing). However, the use of an alternative pricing method results in a fair value measurement categorized within a lower level of the fair value hierarchy. b. When a quoted price in an active market does not represent fair value at the measurement date. That might be the case if, for example, significant events (such as transactions in a principal-to-principal market, trades in a brokered market, or announcements) take place after the close of a market but before the measurement date. A reporting entity shall establish and consistently apply a policy for identifying those events that might affect fair value measurements. However, if the quoted price is adjusted for new information, the adjustment results in a fair value measurement categorized within a lower level of the fair value hierarchy. c. When measuring the fair value of a liability or an instrument classified in a reporting entity’s shareholders’ equity using the quoted price for the identical item traded as an asset in an active market and that price needs to be adjusted for factors specific to the item or the asset (see paragraph 82010-35-16D). If no adjustment to the quoted price of the asset is required, the result is a fair value measurement categorized with in Level 1 of the fair value hierarchy. However, any adjustment to the quoted price of the asset results in a fair value measurement categorized within a lower level of the fair value hierarchy. LO: 3, Bloom: K, Difficulty: Simple, Time: 40-50, AACSB: Communication, Technology, AICPA BB: Technology, AICPA FC: Measurement, Reporting, Research, Technology, AICPA PC: Communication 11-78