Janice Corporation UK is a corporate company that manufactures technology, and the changes like introducing a new product line and redesigning the package will not directly appear on the company’s financial statement, but these changes can improve the company’s competitive advantages in the market. Therefore, the investors look into the company’s future cash flow and assume that will be higher going forward by calculating the fair value. Calculating the fair value, the company and investors estimate future growth rates, profit margins and other risk factors that can influence the company’s cash flow. This paper will address about the economic consequences, the advantages and disadvantages of fair value, and the recommendation regarding the fair value measurement of company assets.
The Economic Consequences
Fair value is the best method that is available to measure and report companies’ financial assets and to reflect market conditions when accompanied by appropriate disclosure. This is also the most effective method to reflect the economic realities of market conditions and allows the companies to see the underlying economic reality in a changing environment (Herz & MacDonald, 2008). Therefore, the Janice Corporation could implement positive accounting theory that can give some contribution to economic consequences because accounting policy choices matter to the company’ management and investors. The information in the financial statement is often used by regulatory bodies in the discharge of regulatory objectives; in such instances, changing accounting standards will have economic consequences because it will change regulatory relationships (Brown, 1990). The companies are required to do the f...
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...olicies that are positive and best for the firm. The company should encourage and motivate the management to an accounting policy that is in the best interest of the company’s shareholders. Positive accounting policy can have economic consequences without cash flow effects and can affect the company’s financial environment. If
Fair value can be determined by the market where security is traded, and it is a price that would be received to sell an asset through transaction between the participants; in addition it reflects the economic realities of market conditions and allows the companies to see the economic consequences. The investors and shareholders look for the company’s consistent cash flow process prior to invest into the company, and it is the company’s management’s responsibility to implement accounting policy that is actually best for the firm.
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