Fair Value Accounting - 2122 Words

Moving towards Fair Value Accounting In the past, historical cost measures were mainly used for reporting as they are reliable. However, historical cost is only relevant upon acquiring the asset and becomes irrelevant as time passes. On the other hand, fair value-based reporting, which accounts for changes in fair values, can produce balance sheet figures that provide a better reflection of the company’s value. This is also why accounting bodies are moving towards fair value accounting (FVA). One of the evident standards is the FASB Standard (SFAS) 157, ‘Fair Value Measurements’, to establish clear, consistent guidelines for fair values measurements and disclosures. SFAS No. 133, ‘Accounting for Derivative Instruments’ and IAS 39 also†¦show more content†¦It is found that managers are more likely to manage earnings because it is hard to verify whether the estimated fair value figures are well-intentioned or manipulated. Having to rely on their estimates introduces informational asymmetry. As in the case of Level 3 inputs, since managers have private information regarding appropriate values to select for model inputs as well as the underlying economic value of an asset (or liability), the informational asymmetry will create two problems- adverse selection and moral hazard. Black et al. found that fair value accounting mitigates incentives for firms to time asset sales to manage earnings. If fair value measures capture unrealized gains and losses that reflect the future earnings, firms will have little incentive to increase current income at the expense of future earnings. However, there are still chances for managers to value assets upwards to increase income so as to increase their performance-based compensation, abide by the debt covenant restrictions and reduce political cost as explained by the positive accounting theory. They could simply take a big bath during rainy days and use the timing of impairments or upward revaluation reversals to boost future earnings for even better compensation. Hence, accounting standard-setters and securities regulators need to determine how much latitude to give managers when they estimate fair values and toShow MoreRelatedIs Fair Value Accounting Really Fair?1021 Words   |  5 Pages For our project, we wanted to pick the topic, â€Å"Is fair value accounting really fair?† The first part of our presentation was simply explaining what fair value accounting is. This is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transactions. According to the Financial Accounting Standards Board, the price that would be received to sell an asset or price to transfer a liability in an orderly transaction betweenRead MoreFair Value Accounting And Audit2360 Words   |  10 Pages Fair Value Accounting and Audit Ivie Uduebho 4/30/2015 Introduction In today’s businesses, there has been an increase in the demand for financial reporting and also, the need to have reliable measurements of fair value and its disclosures. The need for reliable information has caused continuous change to accounting policies which has posed a challenge not only to management of companies, but also to auditors. The frequent changes in accounting principlesRead MoreMeasuring Fair Value Accounting Standards1346 Words   |  6 PagesFair Value accounting is a measurement application to value assets and liabilities based on current transactions among buyers and sellers in the market. In other words, the price market participants pay or receive in an orderly transaction at a certain date. There are different techniques for measuring fair values depending on asset and market activity. It includes market approach, cost approach, and income approach. Financial Accounting standards (FAS 157) defines fair value as â€Å"the price that wouldRead MoreFai r Value Accounting And Financial Reporting2166 Words   |  9 Pagesreporting and also, the need to have reliable measurements of fair value and its disclosures. The need for reliable information has caused continuous change to accounting policies which has posed a challenge not only to management of companies, but also to auditors. The frequent changes in accounting principles pose a challenge for managers in measuring accounting estimates accurately and are an exceedingly difficult task. Fair value accounting is a financial reporting approach in which companies areRead MoreFair Value Accounting And Intangible Assets2641 Words   |  11 PagesFair Value Accounting and Intangible Assets The considerable debate on the advantages and disadvantages of moving towards a full mark to market accounting system for financial institutions has been triggered by the move of the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) to make changes in this direction as part of an attempt to globalize accounting standards. Both fair value accounting and historical cost accounting have their advantagesRead MoreFair-Value Accounting and the Financial Crisis Essay1081 Words   |  5 Pagesnearly as bad if not for the deadly Fair-Value Accounting (FVA) standard. It is, however, my stand that accounting is not the root cause of the financial crisis. I argue that the mixed-attribute model prompted considerable accounting-motivated structures. And due to the selective application of FVA, it did not in practice; contribute to the pro-cyclicality of the financial system. Nor would the meltdown have otherwise been avoided under a different a ccounting scheme. I note that the crisis has hadRead MoreFair Value Accounting : The Gauge Of Reliability And Relevance2160 Words   |  9 Pagescovering fair value accounting usefulness, the gauge of reliability and relevance in accounting through times of early development, financial crisis and recent views. This review aims to realize a comprehensive study of relevant literature in financial accounting with fair value as the main topic. The review attempts to answer the question Is fair value relevant and reliable for financial accounting? Does fair value signify decision useful information? What are the basic properties of fair value and itsRead MoreUsing Fair Value Accounting, Questions and Answers578 Words   |  2 Pagesand disadvantages of using Fair Value Accounting. Accounting valuation is a process by which the value of a company is measured in terms of their assets and liabilities for financial reporting purpose. Andriessen (2003) had been explained the valuation by using the Rescher’s Value Theory in his article. Rescher (1969) used the term of â€Å"evaluation† to describe valuation as ‘a comparative assessment or measurement of something with respect to its embodiment of a certain value.’ Valuation can be achievedRead MoreFair Value Accounting Is Worth Being Used1962 Words   |  8 Pagesstatements, on whether fair value accounting is worth being used. According to IFRS 13, fair value is â€Å"the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date†. Usage of fair value has advantages, however, it has disadvantages as well. This essay will discuss how fair value is more advantageous than disadvantageous and how it is carried out. It will also examine how fair value led Lehman BrothersRead MoreDoes Fair Value Accounting for Non-Financial Assets17711 Words   |  71 PagesDoes Fair Value Accounting for Non-Financial Assets Pass the Market Test? Hans B. Christensen and Valeri V. Nikolaevï€ ª The University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 Abstract: The choice between fair value and historical cost accounting is the subject of longstanding controversy among accounting academics and regulators. Nevertheless, the market based evidence on this subject is very limited. We study the choice of fair value versus historical