What Is a Fair Value Hierarchy?

Fair value measurement refers to the measurement of assets and liabilities based on the price paid for the assets sold or liabilities transferred in an orderly transaction between market participants on the measurement date. Fair value measurement is a necessary means to maintain the order of property rights under the market economy and an important way to improve the quality of accounting information. It represents the general trend of the reform of the accounting measurement system.

Fair value measurement

1. Adapt to the needs of financial innovation

Mainly in contract form

1. The subjectivity of fair value determination is strong Fair value is a judgment of the market value of both parties involved in the transaction, and

Fair value measurement model of new accounting standards and its impact

Reform and improvement of fair value measurement

(1) Strengthen the relevant laws to regulate the fair value. That is, strengthening the construction of laws and systems, and preventing the artificial use of fair value to manipulate profits, etc.

Introduction to fair value measurement

The general methods of fair value measurement generally include the market price method, similar project method, and valuation technology method. The so-called market price method refers to the method of using the market price of assets and liabilities as its fair value. The similar item method refers to an alternative method when the market price of the measured item cannot be found. It is a method of determining the fair value of a measured item by referring to the market price of similar items. The valuation technique method refers to a method of estimating the fair value of a measured item when a certain asset or liability does not exist or there is little market price information. It is generally believed that when determining the fair value of a measured item, one of these three methods must be selected, and the adoption of these three methods has a certain procedure. Under normal circumstances, the preferred method is the market price method, because an open market price is usually the most acceptable and therefore the most fair; when the market price of the measured item is not found, a similar item method is often used. The fair value of the measured item is determined by the market price of similar items selected according to certain strict conditions; and when the measured item does not exist or there is little market price information, so the market price method and similar item method cannot be used, then Consider using valuation techniques to estimate the fair value of the items being measured. The subjective components of these three methods are sequentially increased, and the application difficulty is also sequentially increased. When using these three methods, there are still many strict conditions of use and problems that should be paid attention to. The specific applications of these three methods are introduced below.

Fair value measurement market price method

Market prices, regardless of their source, are considered the best reflection of the fair value of assets and liabilities. Prices on an open market are usually fair and acceptable, and are easily available for certain assets or liabilities. The market price method refers to a fair value measurement method that directly quotes the market price of the measured item as its fair value. The following points should be noted when applying the market price method:

1. The market price used is preferably the transaction price in an active market. The so-called active market refers to a market that meets all the following conditions: (1) the items traded in the market are homogeneous; (2) voluntary buyers and sellers can usually be found at any time; (3) the price is public.

2. The market price of the same item and the nearest market price shall be adopted. The market price should preferably be the market price on the day of measurement.

3. When the market price on the measurement date cannot be found, a slightly earlier market price can be used, but the impact on the fair value due to the passage of time and changes in market conditions between the measurement date and the market price date should be estimated .

4. When there is more than one market price, the market price that is most beneficial to the enterprise should be selected. "Best advantage" means the highest price a company can get. In other words, it means a higher divestiture price for assets, and a lower liquidation or transfer price for liabilities.

Choosing the most favorable market price decision rules is based on the assumption that most companies aim to maximize profits or net assets. Under this premise, enterprises will try their best to find the price that is most beneficial to them. Through bargaining between buyers and sellers in the market, and the game of various market forces, a price that is acceptable to all parties in the market will be formed. However, the "best advantage" is not for the company's own goals. For example, when an enterprise determines the most favorable market price, it may consider the overall objective of the enterprise. As a result, the obtained price may not be the most favorable for the single asset or liability. At this time, the measurement of the asset or liability by the enterprise is not a fair measurement. The measurement of the fair value of an asset or a liability should be the most favorable price for the asset or liability itself, not the most favorable price for the entire enterprise. Favorable price.

5. There is a part of the market price that is not directly related to the rights and obligations of the item being measured. The price of this part should be eliminated. For example, the market price of an asset may include the price of additional services (such as installation costs).

It is worth noting that there is not only a corresponding market price for the measured item, the price must be the fair value of the measured item. In the following cases, the market price cannot be quoted as the fair value of the measured item (this is called market price failure): (1) The transaction that determines the market price occurs during one or more positive experiences Between financially difficult enterprises, for example, companies that are in bankruptcy and liquidation, assets that have been forced to be auctioned by the court, etc. The goal of fair value measurement is to measure the amount that a reporting enterprise can achieve or pay at the reporting date, not the amount that it is forced to trade. But this is not absolute. When most companies in the market that can affect a certain type of assets or liabilities are in financial difficulties, the market price at this time may represent the fairness of the type of assets or liabilities. value. (2) The transaction that determines the market price occurs between related party enterprises. Transactions between related party enterprises are obviously unfair and cannot represent the fair value of such assets or liabilities. (3) The transaction that determines the market price is carried out according to a previously signed contract, and it is only executed in the current period. This transaction price is the price determined by the market conditions on the date of signing the contract, and cannot represent the current fair value of the project, but represents the fair value of the project on the date of signing. Therefore, this price is not the current fair value of the item being measured. (4) The transaction that determines the market price is not an independent transaction. It is also affected by other transactions associated with it. (5) In the presence of well-known factors affecting the fairness of market prices, the obtained market prices cannot be used as fair values. (6) The transaction that determines the market price is not a recurring transaction, and the possibility of the transaction occurring on the measurement date is very small. In this case, companies often need to consider the use of certain valuation techniques, but companies should carefully study the difference between the fair value obtained from the valuation technique and the market price to determine whether to adjust the obtained fair value. Of course, although the market prices in the above cases cannot be used as the basis for determining the fair value, they can help us judge the fairness of the fair value obtained through other channels.

Similar value method for fair value measurement

When the market price of the measured item cannot be found, the market price of the similar item of the measured item can be used as its fair value. When the similar project method is applied, the most important thing is to determine the similar project. So-called similar projects are those that have the same form of cash flow as the project being measured. Because two projects with similar cash flow patterns respond similarly to changes in economic conditions. The specific steps to study whether two projects are similar are as follows: (1) Determine the expected cash flow of the project to be measured. (2) Select another asset or liability that is initially considered to have similar characteristics. (3) Compare the cash flows of the two projects to ensure they are the same. (4) Evaluate whether the factors that affect its value in one project have been equally reflected in another project, for example, different levels of risk. If there is such a factor that is not reflected, it should be confirmed whether the influence of this factor can be reasonably eliminated. If it is not possible to eliminate them reasonably, these two items are not similar items. (5) Determine whether the cash flows of the two projects change in the same way when facing changes in economic conditions. If not, they are not similar items.

After determining that an item is a similar item to the measured item, it does not mean that its market price has become the fair value of the measured item or the reference value of the fair value of the item. It should also refer to some of the market price method applications mentioned above. Attention should be paid to the judgment and adjustment of market price failures.

Fair Value Measurement Technology

When an asset or liability does not exist or there is little market price information, appropriate valuation techniques should be considered to determine the fair value of the asset or liability. The valuation technique method is the most difficult to implement fair value measurement method, it is also the most controversial, and the one that has the greatest impact on the objectivity of fair value measurement. The usual criticisms of fair value are actually focused on the use of The slamming of valuation methods.

The application of valuation techniques must first clarify its application conditions. "A situation where there is no or little market price information" means a situation where at least one of the following conditions exists: (1) an existing or recent transaction is impossible or difficult; (2) the asset or Liabilities are unique or very unusual; (3) Although transactions exist, market participants keep the prices or valuation techniques of their transactions confidential. In these cases, it is necessary to consider the use of appropriate valuation techniques to determine the fair value of the asset or liability.

The so-called "appropriate" valuation technology means that the fair value obtained through the valuation technology of assets should reflect the amount that an enterprise can obtain from selling an asset under normal and fair transactions under the market conditions at the measurement date; or The fair value obtained through the valuation technique of liabilities should reflect the amount that an enterprise can receive in a normal fair transaction under normal market conditions at the measurement date, or the amount that should be paid when the liability is settled . If a valuation technique is used by most market participants to value a certain class of assets or liabilities, then companies should also use this valuation technique to value such assets or liabilities, unless there is evidence that Mature valuation techniques may yield more accurate results, otherwise companies should not arbitrarily change their chosen valuation techniques. If valuation techniques for a certain class of assets or liabilities do not exist for valuation techniques commonly accepted by most market participants, then companies should develop their own valuation techniques. The valuation technology used by an enterprise should be consistent with the economic method used in the valuation of such assets or liabilities, and the fair value obtained by using the valuation technology should be compared with the price in actual transactions to verify the valuation technology. Effectiveness.

When applying valuation techniques, the estimates used by enterprises should be consistent with the estimates and assumptions used by market participants, such as market interest rates, foreign exchange rates, commodity prices, and government and industry statistics. Even in the case where the company's own estimates and assumptions are the sole source of information for certain factors affecting fair value, it is necessary to ensure that these assumptions are consistent with the estimates and assumptions used by market participants.

When an enterprise chooses a valuation technique for measuring fair value, it should ensure that the valuation technique reflects the following elements of the fair value of the measured item: (1) the estimation of future cash flows, or in more complicated cases, a series of futures at different times Cash flows; (2) expectations of possible differences in the amount or time of these cash flows; (3) the time value of money expressed at a risk-free rate; (4) the price that includes inherent uncertainty in assets or liabilities; ( 5) Other factors, including illiquidity and imperfections in the market, sometimes these factors are uncertain Only valuation techniques that reflect these five elements are appropriate valuation techniques.