Pros and Cons of Fair Value Accounting

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note:

ACCOUNTING
1
Table of Contents
Introduction......................................................................................................................................2
Pros and Cons of Fair Value Accounting........................................................................................2
The Three-tier process.....................................................................................................................4
Qualitative characteristics of financial information........................................................................6
Conclusion.......................................................................................................................................7
Reference.........................................................................................................................................8

ACCOUNTING
2
Introduction
The fair value accounting concept has been followed businesses for a long period of time
and the main idea behind the concept is that the assets and liabilities of the business are
measured at existing values. However, it is a requirement that the books of accounts which is
prepared by the management of a company needs to be presented following historical cost
method and not existing value method (Magnan, Menini & Parbonetti, 2015). This leads to
inconsistency in accounting practice which needs to be rectified. The main purpose of the
assessment is to analyze the article which is provided in the question and also analyses the
implications of fair value accounting system in a business environment.
Pros and Cons of Fair Value Accounting
As per the opinion of Chircop and Novotny-Farkas (2016), Fair Value Accounting is
accounting practice which is followed by businesses which allows the businesses to report their
assets and liabilities at prices which are identical to their fair value. The advantages which can be
identified for using this method are listed below:
Minimized Net Profits
In a business which follows FVA, there is a decline in the net profit of the organization
when the value of the asset for the business falls. Similarly, even if the liabilities of the business
rise slightly, the net profit of the falls. This fall in net profits helps the management of the
company to minimize the tax which is paid to the government. This can be considered to be an
advantage to the business (Bowen & Khan, 2014). As the assets and liabilities of the business
increases, the business equity falls. This also signifies that the management has lower amount of
cash in their hands which means that there is more cash in the hands of the management. To