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Fair Value Accounting - Essay Example

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According to AASB number 102 fair value is defined as “the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.” Fair value accounting has raised several concerns with respect to…
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This study is set out to discuss fair value accounting and more specifically determine its role in the credit crisis that rocked the world in 2008. 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 will be considered while trying to draw the befitting approach to the issue.
The Standards of accounting reports, IFRS and US GAAP, aid in deriving from market prices in various circumstances. However, it is not very clear whether these standards are the origin of the predicaments. The allowing of the managements of organisations to be flexible when it comes to dealing with future value accounting problems leads to the manipulation during such times as those of financial crisis. From the perspective thus the market conditions may impact on fair value accounting.
However, according to Laux and Leuz, future value accounting is an approach to the measurement of liabilities and assets in a given company’s balance sheet. FAS’s number 157 definition is that fair value accounting is “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.” Under IFRS fair value has been defined as the sum at which a certain asset and liability could be ...Download file to see next pagesRead More
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