Exages And Disadvantages And Disadvantages Of Fair Value Accounting

Understandably, there are a variety of ways in which a company can manage their earnings, and if accomplished successfully, the results can be highly profitable. Not all techniques are fraudulent, as effective earnings management is considered good for business and shareholders. Income smoothing is a specific example of permissible earnings management that involves controlling fluctuations in net income to make earnings less variable over a given period of time (Goel & Thakor, 2003). Smoothing is acceptable as long as it adheres to the restrictions of U.S. GAAP, which maintains that all revenues and expenses are accounted for in a defined fashion. There are a lot of incentives in figuring how to effectively smooth income, as substantial value can be created through the successful arrangement of financial transactions. Management is able to make more intelligent decisions with regards to the future of the firm if the earnings are able to match the forecasts. One instance this is seen is when management is faced with the decision to smooth total income or

Auditing financial statements whose items are based on fair values are difficult because these values are often determined using assumptions which are subjective.

For our project, we wanted to pick the topic, “Is fair value accounting really fair?” The first part of our presentation was simply explaining what fair value accounting is. This is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transactions. According to the Financial Accounting Standards Board, the price that would be received to sell an asset or price to transfer a liability in an orderly transaction between market participants at the measurement date is the idea behind Fair Value accounting. FASB came up with SFAS 157 to improve this accounting principle. Some of their objectives were to “provide a framework for fair value measurements, change the definition of fair value, elaborate on the concept of market participants.”

As the complexity of our financial economy develops it is important that our accounting standards progress in accordance. Accounting is very important to the development of the global and local economies. Accounting is basically the gathering, summarizing and presenting of financial information of an entity to interested internal, external and possible investors. This information should be presented in a non-bias way so that other people are able understand.

The concept of fair value is correct and useful, but can be problematic during periods of crisis. When the market is down, the value of financial assets will be down as well, while, the value of the assets are up in up markets. There will be fluctuations in the fair values based on the current markets, which can cause huge losses in the financial statements. The up to date fair value is a true value that forces the true picture with a company's investments, such as placement of securities in bad lending practices. Fair value reflects a company's present financial condition.

Over the past several years, there has been a growing controversy over the accounting issues of fair values and historical cost. The basis of this controversy revolves around which one of these principles is the most accurate. There are many different viewpoints on this issue. Many accounting professionals believe that fair value is just as accurate as the historical cost principle, while others believe that the historical cost is more reliable. The facts about each of these valuation methods will be researched and explained throughout this research document, as well as the different viewpoint about which method is the most accurate and reliable.

Secondly, fair value model offers more accurate balance sheet and income statement. The fair value model lists investment properties on the balance sheet at their fair value. Any changes in fair value are recorded directly to the income statement as other gains or losses. Therefore, under fair value model, investors can obtain more relevant and accurate information.

Financial world is at the pace when the accountants are moving their steps towards fair value accounting, moreover FASB and IASB is motivating accountants to increase the use of fair value accounting by establishing new rules. Most of the people concur that fair values are the most reliable measure for financial assets and liabilities that an entity strongly trades, on the other hand some believes if management wants to hold an asset or liability till their maturity then historical method is best for measuring financial assets.

Compare with revaluation method, history cost method will decline the comparability of the market. As we all know, from the 21 century, network, communication, and transportation were enhanced very quickly, so globalization of markets has a huge scale and international trade is highly common for all the country. Therefore accounting is more important for a cooperative or competitive partner. Meeks and Swann (2009) believe that the various accounting report will hinder the progress of international trade. When the company will use history cost to record the fixed assets, the initial value and regular deprecation are written in the financial statement. Accounting to Ying and Kan (1996), due to the development of technology, scarcity of labor and price changes, the historical cost method cannot reflect the real assets. However, the revalued method is used fair value which can show the real price of assets, and Lihong, Yun, Yunying (2010) state that if the fair value used in the accounting, the profit will more approach the profit of economy. What is more, as reported by Ionascu (2012); Mane (2013) that uses fair value in revaluation method is unreliability and it violates the principle of prudence. Thus revaluation method can exhibition the fair value of property, plant, and equipment.

When we look at a benefit of the fair value accounting method we see that a firm will behave differently, and will take this method into consideration when they are purchasing this asset. The decisions tend to be less risky if they know that they will have to devalue the asset in the future. Bad decisions would be something that they would have to identify publicly with future marking to market. Companies would no longer have a motivation to sell assets for the benefit of recognizing an accounting gain. Historically a major financial event or crisis prompts reconsideration of accounting rules governing reported asset valuations. The credit crisis in 2008 generated reconsideration. In the 1980’s the savings and loan crisis prompted accounting rules move away from historical cost accounting. Had there been a fair value accounting system in place in the 1980’s the savings and loan crisis would have not taken years to realize. The banks had made long term mortgage loans and borrowed short term. When the interest

IFRS 13 provides a principles-based framework for measuring fair value in IFRS. This is based on a number of key concepts including unit of account; exit price; valuation premise; highest and best use; principal market; market participant assumptions and the fair value hierarchy. Fair value is an important measurement on the basis of financial reporting. It provides information about what an entity might realize if it sold an asset or might pay to transfer a liability. In recent years, the use of fair value as a measurement basis for financial reporting has been expanded. Determining fair value often requires a variety of assumptions as well as significant judgment. Thus, investors desire timely and

ACC307 INDIVIDUAL ASSIGNMENT TASK 1: Contemporary Issues of Accounting Theory Fair Value Measurement Overview After the International Accounting Standards Board (IASB) released the IFRS 13 Fair Value Measurement in May 2011 for the purpose of completing its joint project with the US Financial Accounting Standards Board (FASB) on fair value, the Australian Accounting Standard Board (AASB) released the Australian equivalent - AASB 13 Fair Value Measurement in the September of the same year. This standard permitted early adoption but generally started to take effect for the financial reporting periods beginning from 1 January 2013. This new standard requires no new requirement for the adoption and but it was accompanied with the issuing of AASB 2011-8 Amendments to Australian Accounting Standards arising from the AASB 13 which has made consequential changes to 32 standards and 9 interpretations for the adoption in Australia. The new standard attempts to unify IFRS and US GAAP by specifying how entities should apply the fair value measurements that applied in previous IFRS standards. It clarifies and redefines 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”, sometimes referred to as an “exit price”. It also sets out a single source guidance for a robust measurement framework to ensure that the requirements are applied consistently and have clear

The ultimate goal of accounting is to provide useful information to those that need it (Siam, & Rashid, 2010). Financial statements analysis is very important to various users because it helps to express the overall financial health of the organization (Gibson, 2013). Managers use the financial statements to measure the profitability of a company, manage day to day activities and make important decisions about pricing, production that will benefit the organization (Gibson, 2013). Financial statements are also used to form contracts between organizations. Using the debt to equity ratio, managers are able to determine how much capital should be raised for investment. Consumers on the other hand need the financial statements to tell them the ability of the company to meet their needs. This study presents a comprehensive assessment of the balance sheet components, income statement components and the fair value accounting system.

Financial Statements basically show the historical performance or record of the company at some previous point of time. By the time when financial statements are made public, changes are many economical areas such as market conditions, currency exchange rate and inflations can change the values of assets and liabilities. In this case there often exist discrepancies between book value of assets and their market values.

Therefore accounting methods are very much important in measuring the profit of the company and company must prepare their finical report by using the fair value and historical cost method simultaneously. However, true financial position of the company or business can be easily calculated by using the accounting methods that are more reliable and accurate. Therefore companies must use both historical and fairly value method to know the actual financial position of the company.