ACCT6007 Financial Accounting Theory and Practice

Running head: ACCOUNTING THEORY AND PRACTICE
Accounting theory and practice
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1ACCOUNTING THEORY AND PRACTICE
Table of Contents
Literature review........................................................................................................................2
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................4
Reference....................................................................................................................................7

2ACCOUNTING THEORY AND PRACTICE
Fair value is that amount for which any asset can be exchanged or any liability can be
settled among the willing and knowledgeable parties at the arm’s length transaction. It is used
for estimating the prices at which the orderly transaction for selling any asset or transferring
any liability will happen among the market participants at date of measurement under the
present market scenario (Iasplus.com, 2018).
Literature review
Concept of the FVA (fair value accounting) is quite old in financial reporting or
business decisions. However, owing to big changes that generally takes place in duration of
20 to 30 years in global economy. It led to financial crisis in the year 2007 and re-emerged as
the hottest topic under the agenda of the accounting standards setters for IFRS as well as US
GAAP. Research carried out by Marra (2016), maintained balance among cons and pros of
FVA and lending ammunition of the same. However, it is closely related with the
requirements of information based and globalized economy.
Answer 1
Pros of fair value accounting –
Superiority of the fair value accounting over the transaction based accounting is
powerfully linked with the concept of applied predictive ability and changes may take place
accordingly. Various pros or advantages of fair value accounting are as follows –
Accurate valuation – fair value (FV) accounting method assists in providing the data
more accurately in terms of valuations of the liabilities and assets. If the prices are
likely to diminish or enhance the valuation will also change accordingly. Current
market price allows the businesses or individuals to know where they stand exactly
(Marra, 2016).
Timely information – as fair value accounting uses the specific information as per the
time and present market scenario it attempts to deliver most relevant projection
possible. Further, it has great value for the firm and encourages the corrective actions
promptly (Magnan, Menini & Parbonetti, 2015).
It provides survival method for difficult economy – as per the historical method, same
value is used for an asset each year in the budget. However, the economy can get
difficult and the price may get reduced which in turn may become the financial