ACCT6007 Financial Accounting Theory and Practice

FINANCIAL
ACCOUNTING THEORY
AND PRACTICE
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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2
In the given assignment, the fair value accounting has been discussed extensively, the pros and cons of
the same has been discussed with relevant literature on the same and the three tier process mentioned
in the statement “the estimation follows a three-tier process, with a strict preference for market-based
measures” has also been analysed. Fair valuation is one of the integral parts of financial reporting and
hence the qualitative characteristic of the same has also been highlighted[ CITATION Ale16 \l 1033 ].
Finally, the elements of the financial statements to which the fair valuation can be applied has also been
discussed.
Fair valuation is one of the valuation techniques or the sale price which is being agreed in between
buyer and the seller assuming that both the parties to the transaction are having the knowledge of the
transaction[ CITATION Cha18 \l 1033 ]. It is basically the unbiased estimate of the market value of the
asset, goods and services. It takes into account many factors like that of acquisition and distribution
cost, replacement cost, supply and demand conditions prevailing in the market and utility of the product
at a given point of time. Off late, it has gained a substantial importance in the field of valuation and is
being used extensively for reporting purposes. There are various pros and cons of using this technique of
valuing things. Some of the pros of the same has been mentioned below:
1. It provides accurate valuation of the assets and the liabilities as it takes into account all the
market factors and thus helps businesses and individuals to know where they stand [ CITATION
Wer17 \l 1033 ].
2. It provides the measurement of true income of an entity as it considers all the relevant market
factors and the inflation factor and trued up assets or liability is being reflected.
3. It has been the most widely used and accepted valuation in accounting standards as well as the
historical cost method is not useful and valid if the asset life has been long[ CITATION Obe18 \l
1033 ].
4. It forms one of the survival strategy in the changing and dynamic economy. Where economy is is
difficult and there are a number of fluctuations, fair value gives allows for asset reduction and
gives the businesses the fighting edge.
Some of the cons of the fair value accounting has been shown below:
1. It is usually ineffective and non worthy when there are large fluctuations in the value during
several times of the year. There are some businesses in which the assets values undergo a large
fluctuations and such volatility is actually not good to record in the books from long term
perspective as there is huge fluctuations in the short term and thus gives misleading picture.
2. In case one of the businesses is seeing the downward revaluations due to the decrease in the
value of the assets, it tends to create the domino effect in the industry. It tends to creates
downward valuations and is even contagious. Thus, many industries and companies try to avoid
this method of accounting as it triggers inventor instability[ CITATION Dic17 \l 1033 ].
3. When the companies are using the fair value approach of accounting and reporting, the
investors who do not notice the same may end up on the losing side and the downward
revaluations in the asset values may lead to investor dissatisfaction who use it as commodities
instead of investments[ CITATION Vie17 \l 1033 ].
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