The Financial Accounting Standards Board

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.”

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.

The fair value of an asset is defined as ‘the price that would be received to sell an asset paid to transfer a liability in an orderly transaction between market participants at the measurement date” (Kieso, Weygandt, & Warfield, 2012). It is a market based measure (Averkamp, 2014). Over the past few years, Generally Accepted Accounting Principles has called for the use of fair value measurement in a company’s financial statements. This is what is referred to as the fair value principle (Kieso, Weygandt, & Warfield, 2012). The fair value of an asset or liability is based on an estimate of what the asset should be worth at the time of sale. This gives rise to some conflict among accounting professionals. It is believed that fair value may not be as accurate

If markets were liquid and transparent for all assets and liabilities, fair value accounting clearly would be reliable information useful in the decision making process. However, because many assets and liabilities do not have an active market, the inputs and methods for estimating their fair value are more subjective and, therefore, the valuations less reliable. Management bias, whether intentional or unintentional,

There have been many debates in previous decades amongst the investors, users of the financial statements, on whether fair value accounting is worth being used. According to IFRS 13, fair value 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”. Usage of fair value has advantages, however, it has disadvantages as well. This essay will discuss how fair value is more advantageous than disadvantageous and how it is carried out. It will also examine how fair value led Lehman Brothers, an American investment bank, into bankruptcy during the global financial crisis and why the trend of fair value has emerged in the recent decades.

Determining the true market value of an asset is sometimes controversial, especially for assets that do not have active and liquid markets. By definition, the fair value does not need the existence of an active market. In case of market inexistence, IASB offers guideline that looks at the type of assets or liabilities. For instance, for property, plant and equipment, depreciated replacement cost is recommended if market based evidence is unascertainable. For biological assets (animals and plants), IASB suggest the use of discounted present values of future cash flows (Weetman, 2011). Later, FASB introduced FASB ASC 820 – Fair Value Measurements and Disclosures (SFAS 157) (Zyla, 2010). The main aim of this statement is to offer additional guidance and information on issues that relate to fair value and its measurement. FASB ASC 820 – Fair Value Measurements, in technical terms, does not bring in any new accounting principle rather it provides financial analysts and auditors with “additional information on how the FASB intends fair value to be measure in any instance it is required in financial reporting” (Zyla, 2010). The FAS 159 – the Fair Value Option(FVO) on Financial Assets and Financial Liabilities – brings in the fair value option that a company may use in their first and successive measurements of their particular financial liabilities and

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

Fair value accounting is to measure selected assets at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The objective of fair value accounting is linked with the objective of ‘decision usefulness’ of general purpose financial reporting. That is, to provide relevant information that is representationally faithful for users.

Earnings per share is introduced by the Financial Accounting Standards Board as the functionality used to calculate an institutions’ earnings for the year-end financial statements. The institutions can be made of up a simple or complex capital structure. It must be calculated on a constant basis in order for reports to remain consistent. FASB provides a formula of “dividing income available to common stockholders by the weighted average number of common shares outstanding during the period” (FASB 2009), to measure each share of stock earned. The net income of an institution simply comes from their income statement. The weighted average of common shares outstanding references on average how much was stock was outstanding during the entire year, since it fluctuated throughout the year. An issue that can be faced when determining earnings per share is the concept of share buybacks. This concept discusses cash that is not actually being invested but gives off the impression of good performance, when in all actuality, nothing had been generated. Investors and creditors focus a lot of attention to the findings of earnings per share as it sparks monetary interests. Ultimately, institutions strive for higher rates of earnings per share to demonstrate the institution’s performance and the likelihood of future success.

While property at the fair value measurement can well reflect the changes, it can at any time on the derivative financial instruments to measure the rights and obligations of reflection, and provide relevant information to the users of the information.

Regulators and Accounting Standards Board have long struggled with the developing comprehensive reporting standards that will improve transparency, reliability, completeness, and comparability of the financial statements prepared by the company. The need to promote investor confidence in the market makes it important to improve the financial reporting standards so that investors are able to obtain accurate, reliable and complete information in order to make informed judgments. This paper reviews recent attempts by SEC and FASB to improve the reporting of off-balance sheet transactions, variable interest entity, and non-controlling interest.

Fair value measurement had gained its hold decades ago in various western world. Relevant jurisdiction and accounting standards had authorized fair value as essential recognition of balance sheet and income [ WR LandsmanFair value accounting for financial instruments: some implications for bank regulation 2006, BIS working paper 209, University of North Corolina Kenan-Flagler Business school]. On 1st August 2008, the scenario behind accounting practices in Malaysia face a regulatory change with the introduction and adoption of FRS 139 “Financial Instruments: Recognition and Measurement” with effective date of 1st January 2010. This is deemed as the first step in recognizing fair value accounting as a reliable and updated practice or model.

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

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

In accounting there are many perspectives on how fair value accounting is relevant and beneficial for financial users. In the eye of standard setters assessing the quality usefulness of fair value information is somewhat a common question for potential and current