Fair Values in Accounting for Financial Instruments - Essay Example

Along with the depth development of financial instruments and fair value accounting practices by national standard setting bodies in many countries, fair value measurements have helped to create a more accurate representation of fact. Because of this, the FASB, IASB and other agencies continue to improve the recognition and measurement standards of financial instruments. For instance, in 1990, Richard C Breeden, the chairman of the SEC pointed out that historical cost for financial reporting does not help to prevent and/or defuse financial risk.

As such, fair value accounting should be taken as the measurement of financial instruments (SEC, 1990). Although many people support the implementation of fair value, the debate about this has not stopped and has become fierce; especially after a financial crisis. As means of providing an example, FASB No. 157 provides a definition of “fair value as 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.

”(Deans, 2007) There also have another defines set out by IASB including IAS 32 (presentation of Financial Instrument) and IAS 39 (recognition and measurement) which Fair value is defined as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. (IASB) IAS 39 defines fair value slightly differently from SFAS 157” (Laux & Leuz, 2009). Firstly, the information provided by the fair value accounting method can be considered as more relevant.

Generally speaking, such information should satisfy the requirements of relevance and reliability at the same time. Brath explains the quality characteristic of accounting information. In this way, he proposes that it includes reliability, relevance, predictive, timely, neutrality, comparability, etc. (Ball, 2006). Historical costs