Corporate Accounting: Fair Value Accounting and its Relevance in Financial Reporting

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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CORPORATE ACCOUNTING
Introduction:
Evolution has been an integral part of accounting landscape ever since its inception. The
objective of accounting is to maintain the records of all financial transactions whether of an
entity or individual, in a summarized and classified manner to make sure that the books of
accounts reflect true implications of these transactions. Over the years as mentioned the subject,
i.e. accounting has undergone number of changes. At the very beginning accounting was
primarily about keeping simple and plain records of financial transactions. With passage of time
new and important concepts were introduced in accounting and financial reporting to improve
the efficiency and effectiveness of book keeping system.
Fair value accounting in contemporary world:
Majority of the people are aware with the term Fair Value Accounting, here in after to be
mentioned as FVA in the document. It is the method to disclose the value of goods, assets and
liabilities at potential market prices. It is often described as an unbiased method to estimate the
value of goods, services, assets and liabilities (Amel-Zadeh, Barth & Landsman, 2017).
Accounting scandals of recent times have raised a significant doubt about the
validity of FVA:
Recent accounting scandals including one of the most sought after accounting scandals in the
history, the fall of Enron, has raised number of questions as to the ability of the concept to
disclose the true and fair picture of an organization’s performance and financial position
(Lachmann, Stefani & Wöhrmann, 2015).
Accounting in FVA:
It is difficult to determine the market prices of assets that do not have an established market
place. FVA is used to ascertain the market value of an asset or a liability based on certain

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CORPORATE ACCOUNTING
conditions. In case of liability it is the amount of expected to be paid in the future to discharge
the same. In case of an asset, the fair value is the expected amount to be received from sale of
such asset less any expenditures necessary to make the sale. Fair value concept is based on
certain assumptions and these must hold true in the future to ensure proper valuation of assets
and liabilities are made using FVA. Only if the underlying assumptions are correct FVA will
reflect the correct and true value of different assets and liabilities that have been valued using the
concept of fair value (Magnan, Menini & Parbonetti, 2015).
Difference with historical costing method:
The difference between historical cost basis accounting and fair value accounting is quite
significant. In historical costing the assets and liabilities are measured and valued at cost, i.e. in
case of assets, these are valued at the amount paid to acquire as on the date of acquisition. In case
of liabilities, these are valued at the amount it was denominate at the time of incurring the
liabilities (Demerjian, Donovan & Larson, 2016). Thus, the difference between the two methods
can be understood from the simple valuation methods that the two concepts used. Both methods
though are different but none are without flaws. Historic and traditional method of accounting
does not take into consideration the time value of money when valuing the assets and liabilities
of an organization. Whereas in FVA though the time value of money is considered but the
underlying assumptions such as presence of perfect competitive conditions is not realistic in
different circumstances (Goh, Li, Ng & Yong, 2015).
Relevance of FVA:
In corporate reporting use of FVA is the way forward to disclose the true and fair values of assets
and liabilities of an organization in the financial statements. Whether it is public sector
organization or private sector organization the use of FVA is the only way to disclose true and
fair values of assets and liabilities in the financial statements. The corporate accounting scandals