Fair Values in Accounting for Financial Instruments - Assignment Example

AASB 139 defines a fair value as “the amount for which a liability or an asset may be exchanged between willing and knowledgeable parties in an arms length business deal”. Therefore, fair value accounting is a financial measurement of liabilities and assets of a company at fair value (Kemp, 2005, pp. 1-2). As a consequence of the synchronization of international accounting standards and additional disclosure requirements regarding risk and volatility, companies are changing from historical cost accounting to fair value accounting.

Fair value accounting provides the users of financial statements present economic state of affairs of a company and presents a better manifestation of market values liabilities and assets, and consequently, the actual company’s worth. The companys financial statements become more relevant and useful in the marketplace for decision-making. In addition, fair value shows changes in economic conditions; thus, application of fair value for all financial assets allows investors to obtain a fairer and truer view of the actual financial situation of a company (Ryan, 2008, pp.3-4). Fair value accounting offers more comparable, accurate and timely information to investors and reflects recent information regarding future cash flows.

Furthermore, in view of the fact that fair value reveals current conditions of the market, it offers comparability of the financial instruments value purchased at dissimilar times in determining the risks and value of financial instruments range (Landsman, 2006, pp.4-5) Fair value accounting also comprises of the significance and probability of all promising future cash flows and brings up to date the sharing of cash flows in future for fresh information regularly. Consequently, stakeholders and capital providers become more up to date when there is an adverse sharing of cash flows in future.

Fair value accounting