Managerial Accounting: Managerial Topic - Research Paper Example

This paper is an attempt to capture a glance of this debate by defining this accounting system and briefly highlighting its pros and cons. Discussion According to the definition of Fair Value as, “It is the Statements of Financial Accounting Standards 157, 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” (Shaffer & Federal Reserve Bank of Boston, pp. 63-68). Therefore, Fair Value Accounting refers to the process of assessing values of assets and liabilities based on their current market price or the price determined by market forces of similar assets and liabilities or any other fair and objective method of assessing value.

Quite understandably, since the market prices are always subject to change, the values on the balance sheet of a company using fair value accounting becomes extremely volatile and changes quickly. Another option available to companies is of “historical cost accounting” or “book value accounting,” which would use the original buying or selling price of the asset or liability (Curtis, pp. 95-99, 2009). However, the problem with such methods is that considering the violate market conditions, those assets quickly become irrelevant.

Consider the example of a company, which holds 1 million of a particular corporation bought at the price of 100 US dollars each. However, that corporation is close a liquidity thus pushing the price of that bond down to just 10 US dollars. If that company is still showing the price of 100 US dollars for that bond then it is clearly committing a fraud (Needles, Powers & Crosson, pp. 12-13). However, important here to note is that in many conditions, the market value of assets and liabilities are not available.

In those conditions, the value allows its calculation by mainly looking at the expectations of future cash flows related to that element. However, there remains the doubt that expectations would be either too optimistic or too pessimistic thus distorting the overall calculation (Warren, Reeve & Duchac, pp. 36-38). An advantage of this accounting method is that it serves as an alarm for companies when the value of their assets is going down. With this method, the company gets an early call of its problems and if it reacts quickly, it can take steps to make the balance sheet of the company look better (Curtis, pp. 95-99). However, with the traditional accounting methods, a company may get to know about the depreciation of the value of its asset so late that there would be no going back.

Furthermore, the investor and shareholders of the company get closer and greater insights to the overall outlook and performance of the company and as mentioned earlier that the company also gets more time to take corrective actions (Needles, Powers & Crosson, pp. 12-13). In addition, this accounting method ensures that companies do not manipulate their net income and losses. The same is true because now companies have to report the realized gains and losses as soon as they occur now when the actual transaction related to that assets and liabilities occur (Shaffer & Federal Reserve Bank of Boston, pp. 63-68). However, one of the biggest problems with fair value accounting appeared on the scene during the current credit crunch when many banks and other financial institutions confronted