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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Alternative Valuation Methods A friend who had a bookkeeping course in high school and who is currently a business major says, “I thought that assets were always reported at their historical cost on a company’s balance sheet. Recently, however, I heard several accounting majors discussing why a company is required (or elects) to report the fair value of an asset. I know that historical cost is the exchange price paid for an asset, so I can’t understand why a company would report any other ‘value’ for the asset, or how that value could be measured.”

Required: Write a short memo that briefly explains why sometimes a company is required (or elects) to report the fair value of an asset. Then define fair value and explain how it is measured.

To determine

Draft a memo that explains the reason for which the company is required to state the fair value of an asset, define the meaning of fair value and explain the manner in which it is measured.

Explanation

Fair value:

The FASB and IASB stated fair value as “the price that is received for selling an asset or the price that is paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The fair value can be known at the date in which the company acquires an asset by payment of cash and this cost is equal to the historical cost of an asset recorded for the transaction. Likewise, upon the beginning of a financial liability, the fair value and the original obligation amount incurred are same

Memo

From

ABC

To

XYZ

Re:  Reason for which the company is required to state the fair value of an asset, define the meaning of fair value and explain the manner in which it is measured. 

I have written a memo explaining the reason for which the company uses fair value to state its assets and measurement of fair values.

Fair value measurements are used by most of the companies, since majority of assets and liabilities are financial in nature. Company should use a valuation method in order to measure fair value. For measuring fair value, there is a “three-tiered” hierarchy within U.S GAAP and IFRS that categorizes among different inputs for ascertaining fair values.

Level 1: In active markets inputs are quoted prices for identical assets and liabilities on the date of measurement. A market price that is quoted gives the most accurate evidence of fair value and it can be used whenever available...

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