Describe the valuation process for financial instruments

Reference no: EM132899929

ACC 640 Accounting Theory and Policy Formulation - Depaul University

Fair Value Disclosures Assignment

Instructions: The purpose of this assignment is for you to learn more about the fair value disclosure requirements included in the FASB Accounting Standards Codification (the Codification). You will do so by examining fair value disclosures included in the following filings:

- Form 10-Qfor Microsoft Corporation (MSFT) for the quarter ending March 31,2021 (filed with the SEC on April 27, 2021).
- Form 10-Q for The Goldman Sachs Group, Inc. (GS) for the quarter ending March 31, 2021 (filed with the SEC on May 4, 2021)

Most of the questions in this assignment can be answered by referring to the Notes to the Financial Statements (Footnotes) in theseSEC filings. Feel free to copy and paste answers when it is appropriate to do so.

Microsoft Corporation

1. List the three categories of investments held by Microsoft for which the corresponding fair value measurements fall within Level 1 of the fair value hierarchy. What is included in Level 1 derivative assets and liabilities? How does the relevant footnote describe Level 1 inputs?

2. List the various categories of investments held by Microsoft for which the corresponding fair value measurements fall within Level 2 of the fair value hierarchy. What is primarily included in Level 2 derivative assets and liabilities? Howdoes the relevant footnotedescribeLevel 2inputs?

3. List the three categories of assets and liabilities held by Microsoft for which the corresponding fair value measurements fall within Level 3 of the fair value hierarchy. Howdoes the relevant footnote describeLevel 3 inputs?

4. How are the gains (losses) on derivative instruments designated as fair value hedges recognized?

5. How are the gains (losses) from changes in fair values on derivative instruments not designated as hedges primarily recognized?

6. Microsoft's equity investments without readily determinable fair values are measured on a nonrecurring basis. How are the fair values of these investments determined?

7. For what purpose does Microsoft use derivative instruments? What are their stated objectives for holding derivatives? Do all derivative programs include strategies that qualify for hedge accounting treatment? How do you know?

8. What is the gross amount of derivative assets and derivative liabilitiesheld by Microsoft atMarch 31, 2021? What is the breakdown of these derivative assets and derivative liabilities among Level 1, Level 2 and Level 3?

9. What was the total carrying value and estimated fair value of Microsoft's long-term debt, including the current portion, as ofMarch 31, 2021?How do these figures compare to the total carrying value and estimated fair value of Microsoft's long-term debt, including the current portion, as of June 30, 2020? The estimated fair values at both dates are based upon inputs at what level in the fair value hierarchy?

10. Explain the procedure that Microsoft uses to determine the fair value of its financial instruments.Hint: Refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section (Part I, Item 2) of the Form 10-Q.

11. Describe Microsoft's "fair value processes" that are used to measure the fair value of its investments? What types of controls does Microsoft have in place with respect to these "processes"? Hint: Use the MD&A to answer this question.

The Goldman Sachs Group, Inc.

12. List the various categories of financial instruments held by Goldman Sachs that are included in Level1 of the fair value hierarchy. How are these Level 1 instruments valued?

13. List the various categories of financial instruments held by Goldman Sachs that are included in Level 2 of the fair value hierarchy. Describe the valuation process for these instruments.

14. Describe the valuation process for financial instruments that are included in Level 3 of the fair value hierarchy.

15. Complete the following table as it applies to Goldman's financial assets accounted for at fair value as of March 2021. Show your calculations for percentages (round percentages to two decimal places).

Level 1

Level 2

Level 3

Investments in Funds at NAV

Counterparty and Cash Collateral Netting

Totalfinancial assets at fair value

Amount (in millions)

% of Totalfinancial assets at fair value

16. Complete the following table as it applies to Goldman's financial liabilities accounted for at fair value as ofMarch 2021. Show your calculations for percentages (round percentages to two decimal places). Also, what is meant by "counterparty and cash collateral netting"?

	Level 1	Level 2	Level 3	Counterparty and Cash Collateral Netting	Total financial liabilities at fair value
Amount (in millions)
% of Total financial liabilities at fair value

17. Complete the table below regarding the fair value of Goldman Sachs' trading cash instrument assets and liabilities as of March 2021 and December 2020.

In millions	Level 1	Level 2	Level 3
Total Trading Cash Instrument Assets as of March 2021
Total Trading Cash Instrument Liabilities as of March 2021
Total Trading Cash Instrument Assets as of December 2020
Cash Trading Instrument Liabilities as of December 2020

18. What is the amount of net unrealized gainson Goldman Sachs' trading cash instruments assets classified within Level 3 of the fair value hierarchy for a) thethree months ended March 2021? What is the amount of net unrealized losses on Goldman Sachs' trading cash instruments assets classified within Level 3 of the fair value hierarchy forthethree months ended March 2020? For each amount, what information is provided as to what contributed to the net unrealized gains/losses?

19. What items were transferred intoLevel 3from Level 2 for the trading cash instrument assets for the three months ended March 2021? What triggered these items to be transferred? What items were transferred out ofLevel 3 to Level 2 for trading cash instrument assets for the three months ended March 2021? What triggered these items to be transferred?

20. How does Goldman Sachs describe "derivatives"? How does Goldman Sachs' describe its two types of over the counter(OTC) derivatives?

21. Goldman Sachs indicates that it "enters into various types of derivatives."Identify and describe the three types of derivatives that Goldman Sachs says it enters into.

22. Goldman Sachs says that, "The firm's level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type." [emphasis added] What are the "product types" that are being referred to?

23. Goldman Sachs also says, "Level 3 derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs". For each of the product types from the answer to the previous question that are Level 3derivatives, describe the unobservable inputs used in the fair value measurement.

24. How does Goldman Sachs include in a) over the counter (OTC) and b) exchange-traded derivativesthat are a part of Level 2 of the fair value hierarchy?

General Questions

25. Compare the information disclosed by Microsoft to comply with the fair value disclosure requirements found inSection 820-10-50 of the Codification with that provided by Goldman Sachs. What is your opinion of the overall value of the information disclosed by each firm?To answer this question, focus on the understandability and usefulness of the disclosures to the users of the financial statements. Finally, compare the extent of Microsoft's disclosures to those made by Goldman Sachs. Why do you think that there is a difference in the level of disclosure detail for the two companies?(8 points)

26. FASB released ASU 2018-13 in August2018. This ASU impacts the disclosures for fair value measurement (ASC 820).
a. Why did FASB issue this update?
b. Who is affected by the amendments in this update?
c. The main provisions of the ASU fall into what three categories?
d. When is ASU 2018-13 effective?

Attachment:- Fair Value Disclosures Assignment.rar

Reference no: EM132899929

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