After studying this chapter, you should be able to:
A significant part of accounting is measurement. And as we discussed in Chapter 2, we have a mixed-attribute measurement model. That is, many items are measured based on historical cost (e.g., property, plant, and equipment, inventory), but increasingly accounting measurements are based on fair value (e.g., financial instruments, impairments). Determining fair value of an item is fairly straightforward when market prices are available (Level 1 in the fair value hierarchy). However, when a market price is not available, accountants must rely on valuation models to develop a fair value estimate (Level 3 of the fair value hierarchy).
Developing fair value estimates based on a valuation model generally involves discounted cash flow techniques, which have three primary ...