Question

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Where a liability is held as a corresponding asset by another entity, the fair value of the liability is determined from the perspective of a market participant that:

Group of answer choices

applies a present value technique to measure the liability.

applies the cost approach to valuing the liability.

calculates the amount required to settle the present obligation.

holds the identical item as an asset at measurement date.

Answer 1

The answer is "applies a present value technique to measure the liability".

As per FASB Statement No. 157, the fair value of a liability is determined from the perspective of a market participant by using the following priciples:

Level 1: Using the quoted price of the identical liability when traded as an asset,

Level 2: Using quoted prices for similar liabilities or similar liabilities when traded as assets, or

Level 3: When none of the level 1 or 2 information is available, by applying certain income or market-based techniques such as a present value technique.

As the liability is held as a corresponding asset by another entity, the level 3 technique is used