Financial Accounting Theory & Practice .

Running head: FINANCIAL ACCOUNTING THEORY AND PRACTICE
Financial Accounting Theory and Practice
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1FINANCIAL ACCOUNTING THEORY AND PRACTICE
Table of Contents
Answer to question 1:.................................................................................................................2
Fair Value Accounting Pros and Cons:......................................................................................2
Pros of Fair Value Accounting:..............................................................................................2
The Cons of Fair Value Accounting:.....................................................................................3
Answer to question 2:.................................................................................................................4
Three-Tier Process:....................................................................................................................4
Answer to question 3:.................................................................................................................5
Qualitative Characteristics of Financial Information:................................................................5
References:.................................................................................................................................8

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Answer to question 1:
Fair value accounting makes the use of present market values as the basis for
identifying certain assets and liabilities. Fair value represents the estimated price based on
which the assets are sold or the liabilities are settled in a transaction to the third party under
the present market conditions (Livne & Markarian, 2018). The latest financial crisis has
shifted its focus on the fair value accounting and resulted in major political debate.
As per the critic’s, fair value accounting has backed considerably to the financial
crisis and has aggravated severalty the financial organisations globally. Advances in the
finance and accounting research have gained both the supporters and critics of using the fair
value measurement in accounting. Perhaps, the fair value standards define how the fair value
must be ascertained for the financial purposes.
Fair Value Accounting Pros and Cons:
Similar to any accounting method, there are numerous advantages and disadvantages
which should be taken into the account prior to implementing the fair value accounting.
Pros of Fair Value Accounting:
Timely Information: As fair value accounting makes the use of specific information for the
present market conditions, it makes an attempt to offer the most relevant estimation (Amel-
Zadeh et al., 2017). Fair value accounting has higher informative value for a business and
encourages quick corrective actions.
Accurate valuation: Fair value accounting assist in providing correct information while
determining the correct values of assets and liabilities. If the prices are anticipated to fall or
increase, then the fair value can help in providing correct information. (McInnis et al., 2018).