Chapter 2 Appendix 2A Chapter 2 Appendix 2A Fair Value Measurements Prepared by: Dragan Stojanovic, CA Rotman School of Management, University of Toronto

2 Fair Value Measurements When measuring fair value, consider the following: Nature, condition, and location of asset Valuation premise: generally value the asset based on highest and best use, regardless of actual use Value based on the most advantageous market Availability data: inputs for the valuation model

3 Measuring Fair Value INPUTS MODEL OUTPUT (FV) Level 1: quoted prices in active market (most reliable) Level 2: quoted prices for similar assets, other market inputs/data Level 3: may include internal estimates (least reliable) Market Model Income Model Cost Model

4 Valuation Models Valuation models include Discounted cash flow models Options pricing models

5 Discounted Cash Flow Models Discounted cash flow models generally incorporate expected cash flow estimates time value of money risk or uncertainty Two accepted approaches used are: Traditional approach: cash flows are considered certain, and discount rate reflects the risk Expected cash flow approach: use risk-free discount rate, but cash flows are adjusted for uncertainty

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