Fair Value Accounting: Pros, Cons and Three-Tier Process

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ACCT6007 Financial Accounting Theory and Practice

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Introduction
The underlying essay is undertaken for presenting a critical review of the article is written
by Antonia Marra and published in the year 2016. This article provides the information on fair
value of accounting and how it helps in valuing the elements of financial statements. It also
discusses the pro and cons of fair value measurement in the global accounting. The critical
review is undertaken by explaining the advantages and disadvantages of fair value accounting
(FV) accounting. This is followed by explaining the three-tier process in detail that is discussed
within the article. In addition to this, the qualitative characteristics of financial information to be
considered using FV method in financial reporting are also discussed within the report.
Part 1: Pros and Cons of Fair Value (FV) Accounting
The concept of FV measurement has been introduced by the IASB and it is used while
preparing the financial reports for the company. It helps in improving the reliability of the
financial information disclosed to the end-users. The application of FV enables the companies to
identify and measure estimated values of assets and liabilities on the balance sheet date so that
their fair market price can be reflected. It helps to provide the true and fair picture of financial
statement. However, the concept is associated with larger debate since its origin due to the
significant benefits and drawbacks that are associated with its use. The major benefit derived by
the companies with the use of fair value accounting approach is that it provides most relevant
information as per the current market conditions. It helps in providing realistic information to
the end-users as also stated in the given article. The fair value measures the value of an asset or
liability as per the market conditions and this makes the information disclosed to be verifiable
from the available market information. Thus, the financial experts have stated that this
accounting approach helps in improving the transparency within the financial reporting and
facilitates the investors for making accurate decisions.
However, the occurrence of the global financial crisis in the year 2008 have highlighted
various criticism associated with this concept. It has been pointed out by various accounting
experts that the use of this approach enabled the business managers for manipulating the
financial results (Marra, 2016). For example, the accounting scandal of Enron has revealed that
business executives have adopted the use of fair values for overstating revenue within the
company. In addition to this, the unavailability of the market price for a given asset can have an
impact on the reliability of the financial information obtained with the use of this concept. Also,
sometimes the observed amount of assets within the market does not provide required
fundamental value of such assets as per IFRS. The inefficiency present within the market can
lead to uncertainty within the fair value and thus resulting in providing misleading information
within the financial statements (Sundgren, 2013).
Part 2: Three tier process or three levels of fair value measurement