The Advantages And Disadvantages Of Fair Value Accounting

The cash basis of accounting records revenues when cash is received and expenses when cash is paid out. The accrual basis of accounting records revenues when they are earned and expenses when resources are used.

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

1. What is the definition of fair value according to ASC 820? Do you believe the discounted cash flow method is capable of computing an estimate that would be considered a reasonably reliable fair value for the patent held by Morris Mining? Why or why not?

In our presentation, we want to discuss how fair value accounting affects society in businesses. One example of how this effected society as a whole was the 2008 financial crisis. In this financial crisis, many companies were impacted but in particular AID insurance company faced a 11 billion dollar write down of debt before FASB introduced their new guidelines of SFAS 157. If this happened after these guidelines were passed, this company would have had a loss more like 900 million dollars. As a result, a company with trillion dollars of assets reported unrealized losses of tens of billions. Another area that was impacted was the American Banking

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.

(A) Audit of fair value is often difficult beings the values are usually determined using subjective assumptions.

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.

In financial management, we recognize that value occurs when there is a positive gap between return on invested capital less cost of capital. Additionally, we recognize that earnings can be judgmental, subject to accounting rules and distortions. Valuations need to be rooted in "hard numbers." Therefore, valuations tend to focus on cash flows, such as operating cash flows and free cash flows over a projected forecast period.

1 The system of the market is not perfect enough. For the lack of effective management of listed companies, the false accounting information disclosure, application of fair value is facing high risk. The government's intervention on the market also is relatively common, causing the price of resources often deviate from the market. Market information can't fully reflect the real

According to Rodríguez-Pérez et al (2011) the debate between the choice of Fair value and Historical cost accounting essentially takes root from the debate of relevance and reliability. The IASB Framework defines relevancy as when information “influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.”Reliability as defined by the IASB framework is when information is faithfully represented, prudent, it contains substance over form, it is neutral, and complete. Even though both

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

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

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.