Final answer:
The three approaches to determining fair value as specified by U.S. GAAP are the market approach, the income approach, and the cost approach.
Step-by-step explanation:
The three approaches to determining fair value as specified by U.S. GAAP are:
Market Approach: This approach determines fair value by comparing the subject asset to similar assets that have been sold in the market. It uses market prices or market multiples as a basis for valuation.
For example, if a company wants to determine the fair value of its land, it might look at recent sales of similar land parcels in the area.
Income Approach: This approach values an asset based on its expected future income or cash flows. It involves estimating the present value of future cash flows, taking into consideration factors such as discount rates and growth rates.
For instance, when valuing a company, an analyst might use the income approach by discounting the future cash flows the company is expected to generate.
Cost Approach: This approach determines fair value by considering the cost to replace the asset or reproduce it. It takes into account factors such as the current cost of materials, labor, and overhead.
For example, if a company wants to determine the fair value of a piece of machinery, it might calculate the cost to replace the machinery with a similar one.