Fair value accounting has led to some heated debates among the accounting community due it being so potentially subjective in nature. Do you think that fair value accounting should be allowed? If yes, say where and why. If not, say why not.

DO the discussion frist then response each posted below.

Posted 1

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IFRS and US GAAP have a standardized framework for measuring fair value and outlined required disclosures. Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date under current market conditions. Fair value accounting is based on the fair valuation of assets and liabilities as of date. This will provide the most accurate valuation and produce accurate financial statements.

IFRS standards are more generic in nature and prefer fair valuation more compared to the US GAAP. According to the IFRS standards, an entity can revalue its property, plant and equipment (PPE) to fair value based on accounting policy, if it can be reliably measured. If the assets are held at revalued amount based on fair value, chances of impairment of asset is remote. In US GAAP, revaluation of PPE is not allowed.

Fair value accounting will provide the investors with true picture of actual financial condition of the company. However, fair value is a subjective term, may not be measurable for all items and an entity may misuse the fair valuation to its advantage. The cost and time spent on getting reliable fair value is high and not every company will be able to afford that costs. Considering these factors, fair value accounting may be suitable for large issuers listed in stock exchanges.

Posted 2

Not many things hold its value over time. That is why I believe fair market value should be allowed. It provides a true price for the item in the present day. Value fluctuates just like everything else within the markets. By using current market values, the fair value displays the amount participants would need to sell or transfer an asset or liability. I don’t see it as being subjective and participants can always reject the offered price. Participating parties should first agree if certain factors help identify a price. It depends on the product, how it was used, how often it was used, damages, etc. There are benefits to this method. The original buyer may see more value than the recipient. The fair market minimizes confusion between buyer and seller. It also helps reduce the probability of reduced or overpricing.

Posted 3

Discussions like these are what tend to flip the accounting world upside down. The staunch arguments regarding fair value accounting stem from the GAAP and IFRS discussions and which provides the best and most accurate representation. Fair value refers to the agreed upon price between the buyer and seller under normal market conditions. “Former SEC chairman Arthur Levitt contended that fair value provides the kind of transparency essential to restore the public confidence in US markets” (Chung, Lee, & Mitra, 2016). Recording assets and liabilities at fair value allow them to fluctuate with prices, provides a value that reflects the actual income, is adaptable, and supports the company’s health. The downside to this valuation type is the impaired reality of the reported financial information. Fair value can leave more flexibility in estimates, and this allows for more errors (Chung et. al., 2016).

Clinging to the reliability and familiarity of historical cost is understandable and comfortable for many of us. It also makes the job easier. However, the research supporting the accuracy of most fair value accounting is very supportive of making the switch. Businesses can likely provide more reliable information regarding their cash flows because the data can be verified in numerous similar, independent transactions rather than just the one sale and guidelines exist separate from the reporting entity. Reporting by historical data leaves room for undervaluation and irrelevance due to the proximity of sales and the dated information (Uthe, 2008).

I would have to think an investor would rather see more accurate and up-to-date data rather than data that may be easier to compare. Most issues tend to come from the lack of guidelines placed on estimations. Some of this could be alleviated by increasing visibility to investors on how estimations are derived, including restrictions on sales of assets and liabilities, and setting comparative guidelines.