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Question
Fair value basics
Camelback Investment Company
Background
Camelback Investment Company (CIC) is a private company that invests in various financial and nonfinancial assets for its shareholders. Assets are measured at fair value at each reporting date so that the
shareholders will know what their underlying shares are worth, which facilitates sales of the limited number
of shares.
It is early January 2011, and as the junior accountant at CIC, you have been asked by the chief financial
officer (CFO) to work with the chief investment officer (CIO) to evaluate and determine the propriety of fair
values that the CIO is proposing for a number of investments as of December 31, 2010. In that regard, the
CFO asks you to challenge the valuation methodologies that the CIO has assigned to the various
investments to ensure they are in compliance with ASU 820 and IFRS 13.
The investments are as follows:
Marketable equity securities
CIC has an investment in 100,000 shares of common stock of a large public company whose stock is
traded on the NYSE. The stock is currently valued in the accounting records at $25.00 per share ($2.5
million), which was the value at the last measurement date of September 30, 2010. The CIO is proposing
to measure the fair value of the common stock at the bid price for the stock at the close of business on the
measurement date of December 31, 2010, which is $27.50 per share. This valuation approach is consistent
with what has been used in the past three years by management. Thus, the fair value is $2.75 million at
year-end.
Private equity securities
CIC has an investment in 100,000 shares of common stock of a private company. There are no market
quotes with respect to the fair value of the common stock; however, the private company’s operations, size
and performance are similar to a company whose stock is traded on the NASDAQ. The CIO has taken
some of the similar company’s market metrics, such as the price/earnings ratio of the common stock, a
discounted earnings calculation and a few others, and has adjusted these metrics to reflect performance
that he believes is better and more accurate of the metrics with which to value the private company and
related investment. However, these revised metrics do not agree with the metrics of the similar public
company or other companies in this industry.
Land
CIC has an investment in a 10-acre parcel of land that is located near downtown Los Angeles that has just
been remediated from an old oil spill. The carrying value of the land at September 30, 2010, was $1 million
per acre, or $10 million, and is the equivalent of the cost of the land plus the costs to remediate the oil spill.
The surrounding area consists of single-story warehouse facilities, which is consistent with the zoning of the
area. The CIO believes that the land can be used to construct either a commercial warehouse or industrial
manufacturing facility; the later requiring rezoning from the city. Recent similar sales of land within the area
have been approximately $800,000 per acre. The CIO is valuing the land at $1 million per acre as he
Fair value basics – case studies 1
