Fair Value Vs Historical Cost Controversy

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ASC 820 requires that the measurement of fair value of assets acquired and liabilities assumed should be based on the

The assets and liabilities being obtained were recorded by the buyer at fair value as of the date of acquisition

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.”

Fair value is defined 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.

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.

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.

40 would require Silic to mark its investment properties to fair value during each reporting period, and report the gains and losses on its income statement. As indicated in the case, French real estate market had experienced substantial upward and downward movements in the value of properties. Thus, a probable outcome of fair value accounting would be a significant fluctuation in the firm’s bottom line during each reporting period. Fluctuations in net income signals great risk of the financial performance of an entity. A normal risk averse investors would not invest in an company that poses significant risk. Therefore, I believe historical cost accounting would present Silic in the most favorable light over

Economic principle’s rationale for requiring guidance for financial institutions is to use mark-to-market accounting or fair value accounting on their financial reports. With the current economic crisis, questions have been raised as to whether or not fair value accounting is making this crisis worse. In this paper I review the history of fair value accounting and the ethics behind whether fair value accounting gives an accurate picture or is it causing a need for higher capital requirements and unnecessary concern with investors. There is a need for transparency. It is Accounting Standards and

The fair value option allow all entities to select and measure eligible items at a fair value at a specified date. The decision involved in whether to elect the fair value option have following conditions. The conditions include that it could be applied instrument by instrument, could be irrevocable which means it cannot be changed and the last condition is applying only to instrument and not to only specified risks, specific cash flows, or portions of that instrument. The fair value option allows business entities to use fair value to measure specific financial assets and financial liabilities in accordance with their own needs and in the initial and subsequent measurement. FASC 825-10-25

In other words, it means the information provided by the company can actually affect the decision making of information users and satisfied the needs of information users. Compared with other accounting methods, fair value accounting can get a more accurate disclosure of a company’s cash flow, and better reflect the company’s operation ability, solvency and financial risk assumed. So that the users of financial report can be better informed of the entity’s financial position and operating performance, to help them to make the right decision. As fair value accounting provides information about current market conditions, it is the most relevant measure for assets and liabilities. For one thing, fair value accounting measure can obtain intangible assets in to financial reports, such as intellectual property rights, human recourses and goodwill etc. make the information of financial report more complete to reflect the financial position, profitability and the ability to face risk. For another, fair value represents the present value of future cash flows, so investors just need the fair value of assets or liabilities and estimates the market interest rate, they could calculated the expect value of assets or liabilities in a certain point in future. Moreover, fair value accounting is a market-based accounting, so it more relevant to the decision making.

The article ‘Market Valuation of Accrual Components’ by Rick Francis tries to focus on the numerous aspects of capital market research to enlighten the knowledge of cash flows and accruals for maintaining equity valuation. In financial accounting theory, this issue has been found as controversial as well as unsettled. However, the main objective of this paper is to know the empirical evidence which helps to understand the market condition, market price and the cash flow of accruals. In this regard Francis ran multiple studies and then he comes up with the idea of evaluating cash flows and accruals components which are very helpful for providing information to the investors before they invest in equity securities. The article also provides some basic concept to the Financial Accounting Standards Board (FASB) regarding the issues of utility on accounting information by focusing equity investors as well as the perception of accrual elements of earnings. The paper supports the preliminary hypothesis which is that valuation for other current accruals is not greater than the receivable accrual. Furthermore, the outcomes of this paper are founded relevant with investor findings gains and losses which are associated with the equity valuation. The outcomes also suggest that valuations for accruals are greater in the market valuation for the cash flow. Not only the receivable accruals but also the other operating accruals are valuable for the investor to

I. Introduction of company valuation methods and process........................................................3 1. Abstract................................................................................................................................3 2. Valuation methods...............................................................................................................3 2.1 Balance sheets – Based methods

The article ‘Market Valuation of Accrual Components’ by Rick Francis tries to focus on the numerous aspects of capital market research in terms of financial accounting to enlighten the theme knowledge of the performance of cash flows and accruals for maintaining equity valuation. To know the empirical evidences which help to understand the market condition, market price and the cash flow of accruals is the main objective of this paper. In his journal he suggested the analysis of financial calculation will find the study easy because of evaluation accrual elements as well as cash flows before represents some recommendations for equity securities. The study also provide some basic concept to the financial accounting standards Board (FASB) regarding the issues of utility on accounting information by focusing equity investors as well as perception of accrual elements of earnings. The record of this paper support preliminary hypothesis which is valuation for other current accruals is not greater than the receivable accrual. Furthermore, the outcomes of this paper are founded relevant with investor findings gains and losses which are associated to the equity valuation. In some point to run the study the author found that cross sectional and temporal issues for measuring accruals components are problematic for the both primary and secondary and this may constrain in this article which may cause for identifying the null hypothesis incorrectly. The outcomes also suggest that

Title: Comparative Analysis Of Fair Value And Historical Cost Accounting On Reported Profit: A Study Of Selected Manufacturing Companies In Nigeria.