ASA Legal & Regulatory Framework 2 — Questions and Answers
Question 1: ASC 820 (formerly SFAS 157) establishes a fair value hierarchy. Which level relies on observable inputs from active markets for identical assets?
- Level 1 (Correct answer)
- Level 2
- Level 3
- Level 0
Correct answer: Level 1
Level 1 inputs are quoted prices in active markets for identical assets or liabilities — the most reliable and least subjective fair value measure.
Question 2: Under ASC 820 fair value measurement, 'principal market' is defined as the market that has:
- The greatest volume and level of activity for the asset (Correct answer)
- The highest price for the asset on the measurement date
- The most favorable price net of transaction costs
- The closest geographic proximity to the reporting entity
Correct answer: The greatest volume and level of activity for the asset
The principal market is the one with the most activity and volume for the asset, providing the most representative price indication.
Question 3: Which Internal Revenue Code section governs the deductibility of charitable contributions of appreciated property and requires a qualified appraisal?
- Section 170 (Correct answer)
- Section 1031
- Section 2031
- Section 6662
Correct answer: Section 170
IRC Section 170 and its regulations specify the rules for deducting charitable contributions, including the qualified appraisal requirement for non-cash gifts over $5,000.
Question 4: In US gift and estate tax valuation, IRC Section 2031 defines the gross estate to be valued at:
- Fair market value at the date of death (or alternate valuation date) (Correct answer)
- Historical cost of all assets owned
- Appraised replacement cost of all assets
- Book value per the decedent's financial statements
Correct answer: Fair market value at the date of death (or alternate valuation date)
IRC Section 2031 requires all estate assets to be included at their fair market value as of the date of death, or the alternate valuation date if elected.
Question 5: The IRS imposes a penalty under IRC Section 6662 for 'substantial valuation misstatements' when the claimed value is what percentage of the correct value?
- 150% or more (or 65% or less for underpayments) (Correct answer)
- 110% or more
- 200% or more
- 125% or more
Correct answer: 150% or more (or 65% or less for underpayments)
A substantial valuation misstatement occurs when reported value is 150% or more (or 65% or less) of the correctly determined value, triggering a 20% penalty.
Question 6: Under USPAP, the Competency Rule requires an appraiser to:
- Disclose any lack of competency before accepting an assignment and either acquire competency or decline (Correct answer)
- Pass a specialty exam before appraising any property type
- Obtain peer review for every assignment involving an unfamiliar property type
- Refer all assignments to a more experienced appraiser
Correct answer: Disclose any lack of competency before accepting an assignment and either acquire competency or decline
USPAP's Competency Rule requires appraisers to recognize their limitations, disclose them to the client, and acquire necessary competency before completing the assignment.
ASA Legal & Regulatory Framework 2
ASC 820 (formerly SFAS 157) establishes a fair value hierarchy.
Which level relies on observable inputs from active markets for identical assets?