The fair value hierarchy establishes three levels of input, with level one being the best type, because it uses the most objective inputs, and level three using the most subjective inputs.
Instructions
For each of the following scenarios, identify the level of fair value input and the method that has been used and what disclosure should be provided to assist the user's understanding.
(a) A company uses the fair value method for reporting its investment property. The company hired a building appraiser who reviewed prices for sales of similar buildings in the neighbourhood to determine the property fair market value.
(b) A company recently purchased a trademark from another company. The trademark was valued using the royaltybased approach. This approach involves estimating the amount of royalties that would have had to be paid on future sales forecasts, if the company did not own the trademark itself. Sales are estimated for the year, then royalty costs are estimated based on these sales and discounted to determine the present value of the trademark.
(c) The company owns 1,000 shares in RX Limited, a publicly traded company. The RX Limited shares were valued by looking at their closing price at the reporting date.
(d) The equipment's fair value was determined using details from a supplier price list for the replacement equipment.
(e) T he company valued one of its brand names using the discounted cash flow method. The sales and costs were forecast for the next five years based on management's plans. T he terminal value was determined to be 3% based on market growth rates anticipated for North America. All of the future cash flows were discounted using the company's weighted average cost of capital.