The Advantages And Disadvantages Of Fair Value Accounting

894 Words2 Pages
bulb-icon

Recommended: Strengths and weaknesses of fair value accounting

Fair Value Accounting Fair value accounting is the acceptable amount relating to a particular asset that is equitable and unbiased (Drury & Colin, 124). Under fair value measurements, it is necessary to keep measuring the assets often so as to reflect the fluctuations happening in the market, explaining its volatile nature in a given financial period. Various factors should be considered when determining the fair value, and they include the production costs, distribution costs, the risk characteristics and the cost of related products in the market (Drury & Colin, 126). There are various valuation techniques used in fair value measurements; therefore, it is the responsibility of the organization to come up with the best approach based on the current situation of their assets or liabilities. One of the most applied techniques focuses on the price of other similar assets in the market, and it is known as the market approach. The other method is concerned with what cost would be used to replace the asset, called the cost approach (IFRS 13).
If they applied the historical cost convention, this provision would not be available, leading to difficulties in such a period. Disadvantages of Fair Value Accounting? Changes in the value of assets may not provide accurate results of income. For example, there are companies that have volatile assets whose prices will keep changing. Volatility will result in a series of gains and losses which may not depict the real picture of gains and losses of the organization over time (Drury & Colin 137). Secondly, using this accounting approach greatly discourages investors in the sense that fluctuations in the net income are frequent. Investors may get discouraged where losses often occur and opt to withdraw their investment. If the historical approach were in place, the volatility would be minimal, and it would not affect the investors that much. Finally, this principle is less reliable in cases where different firms with similar assets value them differently.

Show More
Related

  • Accrual Method Of Accounting Case Study

    912 Words  | 2 Pages

    In order for Jim Turin & Sons, Inc to have used this method of accounting it would have had to match the cost of the merchandise with the revenue earned from the sale. Using the matching of revenue and cost the company would have had to have kept an actual inventory and maintained records of the costs associated with said inventory. Since the costs are not immediately deducted under the accrual method they are deferred to the year when the merchandise is

    Read More

  • Nonprofit And For-Profit Accounting

    1034 Words  | 3 Pages

    In Inventories are sold, and they are purchased on a continuous basis. Due to the varying market conditions, the prices of the inventories may change and as a result, valuation of inventory is imperative. There are various methods that organizations use in valuing stocks. The most common methods are:

    Read More

  • Medical Technology Company Finance Case

    1992 Words  | 4 Pages

    ... value, however, depreciation affects such values as operating profit and value of the company’s assets. If the depreciation is ignored, the Net Income calculations will be erroneous.

    Read More

  • Eskimo Pie Corporation

    1314 Words  | 3 Pages

    The second method we used to analyze the firm’s value was the Comparable Companies Method. We used the historical figures as of 1990 and Goldmans Sach’s Projections. With an average of 22.

    Read More

  • reporting

    665 Words  | 2 Pages

    Whittington, G. (2008). Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View. Abacus, 44(2), pp.139-168.

    Read More

  • Assignment 2

    701 Words  | 2 Pages

    For both years, approximately 26.5% of the assets were financed by the company's creditors (long –term and current creditors). The fair value of the assets would have to decline to 26.5% below their carrying amount. The creditors would not be protected in liquidation.

    Read More

  • Investment Banking: Jpmorgan Chase

    1275 Words  | 3 Pages

    If they company thinks that the earning will fall, stocks will decrease; deterring from investors losing money these types of

    Read More

  • Cost Accounting: Its role and ethical considerations

    1039 Words  | 3 Pages

    Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Role of Cost Accounting: Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company?s financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged.

    Read More

  • Essay On Positive Accounting Theory

    3052 Words  | 7 Pages

    Positive accounting theory is arguably an explanatory of accounting practice; economic based theory. RL Watts and JL Zimmerman developed positive accounting theory in 1980s at the William E School of Administration at the Rochester University. People do not know what they want at times. So there are different options available to accountants. There are some logical facts to choose one specific method. On choosing one specific method, accountants will maximize their own benefit first, and then company benefit, shareholder benefit and at last social benefits. A specific method will allow accountants to feel better to do their work as they like them the way they know and they way they are best at doing (Jayne Godfrey). For instance, accountant will write accumulated depreciation on asset value side for big company whereas when a poor balance sheet, it is better to put accumulated depreciation on credit side, so the company will have extra money in their debit (Ken Leo, John Hoggett, 2012). Accountants will use choice of accounting method depending on the situation. Positive accounting theory consists of different types of hypothesis such as bonus plan, political cost and debt hypothesis, which allow the managers to choose one specific method over another. It is accountants’ theory and it is descriptive and accountants will tell what to record.

    Read More

  • Finance Q & A

    959 Words  | 2 Pages

    Valuation Principle is the analysis between values of benefits and costs. This gives an understanding for creating decisions in a company. When valuing a company in a competitive market. Its good price will always be the basis rather than the preference or opinion of a person or a firm. Hence, the valuation principle is the commodity or asset to the investors or firm that is recognized by the competitive market. The financial manager will weigh the costs and benefits of decision in utilizing that market price. Of course, if the benefits exceed the costs, the decision made by the financial manager will increase because of the firm’s market value (Fundamentals of Corporate Finance, 2011).

    Read More

  • Fundamental Analysis Vs. Financial Analysis?

    781 Words  | 2 Pages

    Book Value- Book Value can be defined as the total worth of a company if its assets are liquidated and the liabilities are all paid out. Book value can also be considered the value of a particular asset on the company’s balance sheet after taking accumulated depreciation into account. The book value can be calculated by subtracting the company’s intangible assets and liabilities from its physical assets.

    Read More

  • Importance Of Accounting History

    754 Words  | 2 Pages

    The recording of accounting history allows for research of a high calibre and quality to be developed. If developments and research of the past were not recorded

    Read More

  • Warren Buffett Case Study

    1809 Words  | 4 Pages

    Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting

    Read More

  • Comparing Physical to Financial Capital Maintenance

    877 Words  | 2 Pages

    Initially, it appears that physical capital maintenance provides information that is more complete with better predictive and confirmatory value by its use of fair value. In actuality, it provides management with a greater ability to manipulate financial information and the wherewithal to do so resulting in decreased decision usefulness, as described by SFAC No. 8, compared to financial capital maintenance. Therefore, financial capital maintenance is the better choice for standards setters.

    Read More

  • Generally Accepted Accounting Principles

    1219 Words  | 3 Pages

    GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a company's financial statements. And even though variations might exist, one can make realistically confident conclusions when comparing one company to another, or when comparing one company's financial statistics to the statistics for the industry as a whole. Over the years the generally accepted accounting principles have become more multifaceted because financial transactions have become more intricate (Accounting Principles, 2011).

    Read More

More about The Advantages And Disadvantages Of Fair Value Accounting

Open Document