Case Study on Fair Value Accounting

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

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Table of Contents
Part A: Essay....................................................................................................................................2
Part B: Case Study...........................................................................................................................5
References........................................................................................................................................9

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Part A: Essay
Introduction
Over the years, Fair Value Measurement is regarded as one of the most popular
approaches for the valuation of the assets and liabilities of the companies. Fair value accounting
is the process where the companies measure their assets and liabilities based on the current
market price (Hodder, Hopkins & Schipper, 2014). It can be seen that there are certain major
arguments on the effectiveness of fair value accounting in the measurement of the assets and
liabilities of the public and private companies. The main aim of this essay is the analysis of the
relevance of fair value accounting in the current business world.
Discussion
According to IFRS 13 Fair Value Measurement, Fair Value can be defined as the price
that the companies would receive to sell an asset or paid to transfer a liability in an orderly
transaction between the market participants at the date of measurement (cpaaustralia.com.au,
2019). Thus, the primary use of the fair value accounting is to provide the users of the financial
statements the useful information about the company’s assets and liabilities. However, the
situation has become complicated as there are many arguments on the relevance of the use of fair
value accounting for the private and public corporations (Palea, 2014). While comparing the fair
value accounting with the historical cost accounting, it can be seen that there is more
transparency in the financial statements under the use of fair value accounting as the users can
know the more relevant market prices of the assets and liabilities. However, it can be seen at the
same time that information of the assets and liabilities under historical cost accounting is relevant
to the users only on the date of measurement. This aspect indicates towards the presence of

3CORPORATE ACCOUNTING
relevance as well as reliability in the fair value accounting due to the fact that the users of the
financial statements can obtain the most recent information of the assets and liabilities under fair
value accounting (Magnan, Menini & Parbonetti, 2015).
It can be seen over the years that many private as well as public companies have adopted
the fair value accounting for the valuation of their assets and liabilities. Under the fair value
accounting, the income statements of the private and public corporations provide the users with
the information about the economic income of the firms due to its ability to catch the change in
firms’ value due to the change in the values of assets and liabilities (Lachmann, Stefani &
Wöhrmann, 2015). It implies that the adoption of fair value accounting assists in delivering
relevant and understandable financial information related to the assets and liabilities so that the
key stakeholders of the firms can make correct decisions about the resources and economic
income (Betakova, Hrazdilova-Bockova & Skoda, 2014). This aspect supports the usefulness of
fair value accounting in the public and private companies to deliver the correct value of the
assets and liabilities. In addition, the income statements as per fair value accounting play a
crucial role in providing information on the managements’ performance and risk revelation to the
key stakeholders (Linsmeier, 2013).
Over the years, there have been many arguments on the role of fair value accounting in
the world financial crisis in the presence of the fact that fair value accounting had major
contribution towards the measurement complexities of the assets and liabilities to determine the
subprime position of the companies (Altamuro & Zhang, 2013). Many of the critiques all over
the world argued on the fact that fair value accounting showed the way to the companies to use
debts that made them highly leveraged and this led to the decline of those companies at the time
of economic recession (Francis, Hasan & Wu, 2013). Due to this, there was immense pressure on