StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Fair Value Accounting - Essay Example

Comments (0) Cite this document
Summary
Fair value accounting is a way of accounting in which financial instruments are measured using 'fair values'. Fair value is the current exchangeable price of an asset or liability in an active market between willing and knowledgeable participants. The IFRS support the fair value accounting system and require more and more financial instruments to be measured at fair values…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER94.8% of users find it useful
Fair Value Accounting
Read TextPreview

Extract of sample "Fair Value Accounting"

Download file to see previous pages Since then, the pros and cons of fair value accounting have been debated. On one hand, fair values provide a better view of current market conditions and therefore provide him with more relevant information. However, on the other hand it increases volatility in earnings and may not necessarily ensure reliability and relevance. This is because if an active market does not exist, it would be determined by calculations which are subject to management bias. While some people argue that fair value accounting provides us with truer financial statements, others question its validity. Hence, those institutions that use more and more of fair value option should also disclose adequate information regarding the assumptions, changes in acquisitions or sales, predictions and all those factors that affected the values that show in the financial statements as fair values. This would enable the users of financial statements to make knowledgeable and wise decisions.
Fair value accounting is a way of accounting in which an asset or liability is valued at its current exchange price at a measurement date, in absence of an actual transaction for that asset or liability. In financial statements, all financial instruments may be valued at fair value.
Before 200...
The statement defines fair value of an asset as the price at which it can be traded or sold in an orderly transaction between 'market participants', other than in insolvency. Similarly, fair value of a liability is the amount at which it can be acquired or settled in an existing transaction between 'market participants', other than in insolvency. (KPMG, 2007)
Market participants refer to buyers and sellers in the most principal or beneficial markets for those assets or liabilities. They meet four criteria: they are unrelated with the reporting body; they possess the knowledge required to have a realistic insight into the transactions; they are financially and legally able to carryout transactions for the entity; they are prepared to transact without any pressure. (KPMG, 2007)
Principal market is the market with maximum volume and level of activity where assets and liabilities are sold or traded by a reporting entity. An entity that does not have a principal market determines its most beneficial market by including the transaction costs. (KPMG, 2007)
Explanation
Fair value of an asset may be equal to its quoted market price. However, this may not always be true. Fair value takes into account advantages and disadvantages that each party may gain from the transaction whereas market value may not always consider that. Also there might not be a quoted price for all assets or liabilities. In such circumstances, fair value has to be generated using the best information available to the preparers. Consequently, difficulties arise in creating those estimates. (KPMG, 2007)
In accounting, fair value is used for those assets or liabilities whose carrying value is rooted in mark-to-market value. Carrying value is the amount ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Fair Value Accounting Essay Example | Topics and Well Written Essays - 4250 words”, n.d.)
Fair Value Accounting Essay Example | Topics and Well Written Essays - 4250 words. Retrieved from https://studentshare.org/miscellaneous/1503832-fair-value-accounting
(Fair Value Accounting Essay Example | Topics and Well Written Essays - 4250 Words)
Fair Value Accounting Essay Example | Topics and Well Written Essays - 4250 Words. https://studentshare.org/miscellaneous/1503832-fair-value-accounting.
“Fair Value Accounting Essay Example | Topics and Well Written Essays - 4250 Words”, n.d. https://studentshare.org/miscellaneous/1503832-fair-value-accounting.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Fair Value Accounting

Finance: Fair value accounting during the financial crisis

...nal institutions had to face failures and ultimately, bankruptcy. As a result, a number of debates have been observed between investigators that the credit crunch was due to the misinterpretation of assets and hedging strategies in the shape of subprime loans and mortgage backed securities (Deff and Phelps). The major concern of the debaters was the implication of fair value accounting systems which led to the situation where it has been blamed for facilitating the sustainment of the financial crisis which has led to massive government bailouts of financial institutions. As a result, it was marked that the Bush administration, FASB and SEC responded to the financial crisis with Acts and amendments to take a grasp of the situation...
22 Pages(5500 words)Research Paper

I. The CEO of the company believes that the company should incorporate fair value accounting from next year while preparing and

...performance. The other stakeholders such as employees, suppliers, and stockholders also find fair value accounting more realistic in predicting the trends in business. It is, therefore, easier to ascertain if the business is a going concern concept is on course or otherwise. According to the international accounting standards, fair value refers to the value of an asset or liability, which forms the basis of exchange between willing parties trough arm’s length production. In other words, in free market transactions the fair value is equal to the market prices, which is determined by the...
6 Pages(1500 words)Essay

Fair Value Accounting

.... It will try to justify the statement that, “Fair value accounting only works in efficient, active and liquid markets. In order to produce information which is relevant and reliable, fair value focuses on market prices.” Due to the financial crisis, fair-value approach for accounting has triggered major debates globally. Among the debaters are the European Commission, USA Congress as well as accounting and banking regulators in the globe. Cynics have it that the financial crisis impacting the whole world in the recent past has been mostly caused by the effects of fair-value accounting. The study is going to determine whether fair value accounting is only applicable in active, efficient and liquid markets. Various arguments...
6 Pages(1500 words)Essay

Fair Value of Accounting

...the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized. Fair value accounting has cemented its place really well in the world of accounting on the grounds that it gives more relevant information to users. This method is a realistic approach that gives the actual worth of an entity. According to Patricia McConnell1, fair value accounting method requires the preparers of financial statements to adjust them...
5 Pages(1250 words)Research Paper

Presentation: Accounting as an instrument of neoliberalisation:Exploring the adoption of fair value accounting in China

...in creation of complex financial instruments, massive financial speculation….. Slide# 7 We will see the results of implementation of fair value accounting in china. The Chinese accounting standard –ASBE 22: Recognition and Measurement of Financial Instruments, which is equivalent to IAS 39: Financial Instruments, Recognition and Measurement –has brought about the most significant changes to Chinese listed companies’ financial reporting since the introduction of the new CAS in 2007. This approach, as mediated through the ASBE 22, has led to huge volatilities in the reported profits of Chinese listed companies. Despite its technical limitations, we argue that the popularity...
1 Pages(250 words)PowerPoint Presentation

Strong debate about the advantages and disadvantages of fair-value accounting

.... This guidance is the same as US GAAP guidance. IFRS 13 defines fair value and sets out a requirement about fair value measurement disclosures. Fair value accounting is an approach in financial accounting where firms are allowed or required to quantify and report an ongoing basis of the financial instruments at estimates. These are the estimates that they would get if they were to sell the financial instruments in this case assets and liabilities. The companies report profits or losses when the value of their assets increase or their liabilities decreases. The losses decrease the...
9 Pages(2250 words)Assignment

The recent financial crisis has led to a strong debate about the advantages and disadvantages of fair-value accounting. In particular, many critics have argued that fair-value accounting has significantly contributed to the financial crisis or, at least,

... disorderly. Financial institutions have lost billions when the fair value of certain securities dropped steeply and suddenly (Kotz, 2009). Fair Value measures the price at which one can sell or buy a particular asset in an orderly transaction on a specific measurement date within the participants of the market (Ryan, 2008). The paper is a discussion of the fair value accounting system as a critique for its applicability in the present economic and accounting conditions of the markets. It compares and contrasts the fair value accounting system with other measures like the historical cost accounting, replacement cost accounting and deprival value in the light of its contribution towards the occurrence or even increasing the severity...
9 Pages(2250 words)Assignment

The recent financial crisis has led to a strong debate about the advantages and disadvantages of fair-value accounting. In particular, many critics have argued that fair-value accounting has significantly contributed to the financial crisis or, at least,

...institutions were led to devaluating their assets based on the concept of fair valuing. As a result, a number of mortgages, bonds and debts that were performing well were undervalued. This pushed many firms towards insolvency. Many politicians and economists in Europe and the US had suggested removing the concept of fair value system of accounting and favoured historical cost accounting in which assets were generally valued at their original prices (Benston, 2008). Understanding Fair Value Accounting In order to critically analyze whether or not fair...
9 Pages(2250 words)Assignment

Financial crises and Fair Value Accounting (Historical cost,deprival value and replacement cost)

...was one of the main factors which intensely fuelled the financial crisis. On the other hand, the supporters of fair value accounting method argued that the role of this method of valuation was minimalistic in the financial crisis and that the use of other methods of accounting could not have prevented the crisis. They identified that certain macro-economic factors like account surpluses, dispersing of loans without credibility checking, excess level of risk taking by the banks and the sharp fall in the prices of mortgage backed assets to be the main factors driving the financial crisis. The financial crisis of 2008 was a deep recession which impacted...
9 Pages(2250 words)Essay

Fair value accounting

... aspect of US GAAP (United States Generally Accepted Accounting Principles) for over five decades yet its implementation increased significantly since issuance of Fair Value Measurement Standard (FAS 157) in 2006 by the Financial Accounting Standards Board (FASB) (Ryan, 2008; Khan, 2010). Fair value accounting, which is also known as mark to market accounting, gained considerable amount of spotlight as a result of its controversial role in the financial crisis of 2007-08. Critics argued that if fair value accounting does not have direct role in the crisis, it at least exacerbated the severity of the crisis. The prominent allegation suggests that fair value accounting results in heightened leverage during the market boom period while market...
10 Pages(2500 words)Coursework

International Accounting

The Profit and Loss for 2006 of PSA Peugeot Citroen is presented Vertically as depicted in its annual report. Further, there are ‘Functional breakdown’ of expenses, as the headings of expense accounts are as per functions performed, e.g., Cost of Goods and Service sold, Selling, General, and Administrative Expenses, Research and Development Costs, and like that.

Legal Reserve is the reserve as required by any national law of the country of the European Union. This is depicted in the subhead of ‘Retained Earnings’ under ‘Equity’ of PSA Peugeot Citroen's Balance Sheet in accordance with Article 9 of the Fourth Schedule.

“Legal reserves are a mechanism whereby management...
10 Pages(2500 words)Case Study

Accounting & Financial Management

AWB’s operations can be categorized into areas ranging from ‘pool management services’ to ‘harvest financing’, and ‘International commodity management’. Only a company with such a big range of activities and financial outlays can become the benchmark for an equally big company like ‘Woolworth Limited’.

The performance of an entity can be better analyzed through its profitability analyses. The profitability ratios like Gross Profit ratio, Net Profit Margins, Return on assets (ROA), and Return on Equity (ROE). The calculations of such ratios are shown in the attached annexure. The Gross Profit ratio measures the percentage of each pound or dollar of sales remaining aft...
10 Pages(2500 words)Assignment

HR Model That Can Measure if It Adds Value

There has been a change of approach in the way that labor is reviewed in the organization and the modern perception emphasizes viewing labor as an investment and not as a commodity or resources. In this regard, labors have started to be seen as a made of creative and innovative social being who is able to give the organization a competitive edge. (Michael 2006, p. 42)
The term human resource has been changing to broader management and the concept of human capital has been applied more often in place of human resources. Therefore the modern perception of human labor has been changing the way organization have been handling their human capital to a more liberalized way. It has been realized that having a competitive workforce c...
13 Pages(3250 words)Assignment

Economic Value Added as Tool for Improving Performances

To discover whether pure profits exist, take the revenue of the firm and deduct the costs of all factors of production other than capital. Then deduct the pure return on capital and any risk premium necessary to compensate the owners of capital for risks associated with its use. Anything that remains is pure profits.” Simply in economic terminology economic value added (EVA) is commercial profits reduced by opportunity costs (that is the pure return on riskless investment and the risk premium). Lipsey calls the EVA defined in this fashion as “pure profits, economic profits or, where there is no room for ambiguity, just profits”.

Investors in any company are interested in real profits that are profits r...
7 Pages(1750 words)Report

Cultural Value Orientations: German vs. Turkish

When organizational culture is discussed in the context of national culture, it is based on certain assumptions. According to Schein (2004 qt. Browaeys and Price 2008) culture can be defined as:

"...a set of basic assumptions - shared solutions to universal problems of external adaptation (how to survive) and internal integration (how to stay together) - which have evolved over time and are handed down from one generation to the next".

External adaptation here refers to factors or culture which the management can control while internal integration means the relationship which binds them to the group. In this context management styles and approaches are often influenced by the cultural value orientation - that...
7 Pages(1750 words)Case Study

Accounting for Leases

The classification needs to be made at the inception of the lease itself. Risk, with respect to leasing, refers to the possibility of loss arising on account of under-utilization or technological obsolescence of the asset. Reward means the incremental net cash flows that are generated from the usage of the asset over its economic life and the realization of the anticipated residual value on expiry of the economic life. A lease which cannot be classified as a finance lease is known as an operating lease. In the following situations a lease is classified as Finance lease:
The lower of the present value of minimum lease payments and the fair value of the asset is recognized as an asset and liability. The minimum lease payments a...
6 Pages(1500 words)Assignment

Accounting systems and Assurance

The allocation of resources is dependent on the information regarding the financial condition of the firm. Here comes the role of accounting, which provides all the required financial information to the investors through several financial reports. There There are two classifications of accounting 1) financial accounting and 2) management accounting. Financial accounting is the one which furnishes all the financial information to the investors and management accounting is used at the micro-level where the internal allocation of the funds takes place. Accounting is one of the most crucial components of any organization as it provides all those financial information that is used to make the economic and financing decision making.&nbs...
9 Pages(2250 words)Coursework

Evaluation of Performance of a Bank Using Published Accounting Data

...Table of Content Introduction: 2 Background 3 Thesis ment 4 Main Body 4 Conclusion 6 Limitations 7 Recommendations 7 Bibliography 8 Evaluation of Performance of a Bank Using Published Accounting Data Introduction: Banks are the global industrial powerhouses1 and they have introduced very complex and risky products and services. During its operation, every bank is exposed to credit risk, liquidity problems, interest risk, market risk, operational and management risk.2 The collapse of banking industry severely influences the world financial system, which means that it is very important to evaluate the performance of the banks. There are different parameters based on which performance of a bank can be evaluated such as financial management...
7 Pages(1750 words)Case Study

Progress on G20 Summit on Accounting Standards

The said declaration contains the results of the discussions of the G20 leaders related to the current financial crisis. It contains what the G20 believes are the causes of the financial crisis and the actions to be taken.

The said declaration contained the short-term (classified as immediate actions) and medium-term actions that the G20 members think should be done to achieve true financial reforms. As part of the medium-term actions, the declaration states that “the key global accounting standard bodies should work intensively toward the objective of creating a single set of high-quality global standard”. It also stated that “regulators, supervisors, and accounting standard setters, as appropriate, s...
9 Pages(2250 words)Lab Report

Alternative Methods of Accounting

...). The metric is utilized by financial analyst to evaluate the common stock price of a company. Economist believe that EVA is a better indicator of common stock value than other metrics commonly utilized by accountants such as return on equity, return on assets, and operating income. The mathematical formula to calculate EVA is EVA = NOPAT - capital charge or EVA = [Turnover –operating expenses – (average capital – cost of capital)] (Steward & Schonburg, 1999). Creating awareness and educating the employee about EVA can help companies meet their goals. A creative manager can create incentives based on EVA results to motivate employees to achieve a higher level of performance. “A proper calculation of EVA values spending on R&D and employee...
8 Pages(2000 words)Article
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Fair Value Accounting for FREE!

Contact Us