Fair Value Accounting And Financial Reporting

2166 Words Apr 30th, 2015 9 Pages
Introduction
In today’s businesses, there has been an increase in the demand for financial reporting and also, the need to have reliable measurements of fair value and its disclosures. The need for reliable information has caused continuous change to accounting policies which has posed a challenge not only to management of companies, but also to auditors. The frequent changes in accounting principles pose a challenge for managers in measuring accounting estimates accurately and are an exceedingly difficult task. Fair value accounting is a financial reporting approach in which companies are required to measure and report on an ongoing basis certain assets and liabilities at estimates of the prices they would receive if they were to sell the assets or would pay if they were to settle their liabilities. Under fair value accounting, companies report losses when the fair values of their assets decrease or liabilities increase. Those losses reduce companies’ reported equity and may also reduce companies’ reported net income.
The International Financial Reporting Standards (IFRS) also defines 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”. According to these definitions, fair value is an unrealistic, idealized qualitative value. The current market value is a quantitative value and it does not fully reflect the value of assets when the markets are not…
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