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E2 Fair value and measurement bases

Written by Saad Rahman (ACCA)

8 ACCA New at Expertise level questions with answers and explanations.

Printable worksheet with answer key

All questions with answers
  1. Fair value under IFRS 13 is best described as:

    • 1 The cost of buying the asset
    • 2 The carrying amount less depreciation
    • 3 The price to sell an asset or transfer a liability in an orderly transaction between market participants
    • 4 The price in the entity's own best case
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    Correct answer: The price to sell an asset or transfer a liability in an orderly transaction between market participants

    It is an exit price at the measurement date.

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  2. Which inputs are Level 1 in the fair value hierarchy?

    • 1 Historical costs
    • 2 Quoted prices in active markets for identical items
    • 3 Observable inputs for similar items
    • 4 The entity's own assumptions
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    Correct answer: Quoted prices in active markets for identical items

    Level 2 inputs are other observable inputs and Level 3 inputs are unobservable.

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  3. A valuation uses the entity's own assumptions because no market data is available. Which level is it?

    • 1 Level 2
    • 2 Level 1
    • 3 Level 3
    • 4 It is not fair value
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    Correct answer: Level 3

    Level 3 inputs are unobservable.

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  4. Are transaction costs deducted when measuring fair value?

    • 1 No, fair value is not adjusted for transaction costs
    • 2 Yes, for liabilities only
    • 3 Yes, always
    • 4 Only for financial assets
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    Correct answer: No, fair value is not adjusted for transaction costs

    Costs of buying or selling are not part of the exit price.

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  5. For a non-financial asset, which use does fair value assume?

    • 1 The use the owner prefers
    • 2 The current use only
    • 3 The highest and best use for a market participant
    • 4 The cheapest use
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    Correct answer: The highest and best use for a market participant

    It must be physically possible, legally permissible and financially feasible.

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  6. Which is an advantage of historical cost?

    • 1 It needs no judgement
    • 2 It adjusts for inflation
    • 3 It is objective and verifiable
    • 4 It always reflects current values
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    Correct answer: It is objective and verifiable

    Current values give more relevance but less reliability.

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  7. In the hierarchy, a fair value measurement uses one Level 3 input that is significant. What is the classification of the whole measurement?

    • 1 Level 2
    • 2 It depends on the largest input
    • 3 Level 3
    • 4 Level 1
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    Correct answer: Level 3

    It takes the level of the lowest input that is significant.

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  8. Which is a disadvantage of current value measurement compared with historical cost?

    • 1 It cannot be audited at all
    • 2 It ignores market prices
    • 3 It can be less reliable and costlier to prepare
    • 4 It is not relevant
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    Correct answer: It can be less reliable and costlier to prepare

    It needs estimates and judgement.

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