Pros and Cons of Fair Value Accounting

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FAIR VALUE
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The concept of fair value accounting refers to the method in which an asset or a liability or
any other thing for that matter is reported at the value which it would fetch in the open market
when sold. These have to be reported at their respective fair values in the financial
statements.
Pros of the method:
 It is more accurate. This is the method which helps in gaining an accuracy when it
comes to the valuation of the assets and the liabilities. In case, the prices of these
assets or the liabilities increase or decrease, then the fair value accounting could help
in the same. In case, there is an occurrence of sales, then any sort of a discrepancy
would change in case, there is a change in the transaction. When these are reported at
their respective current prices, then this allows the individuals or the businesses to
understand as to where they stand.
 It helps in the measurement of true income that the company earns. There is a lesser
chances of manipulation any data when it comes to the valuation of these assets and
the liabilities at their respective fair values. In fact, the fair value method helps in the
tracking of the actual or the estimated values. The changes to this income takes place
when there is a change in the value of an asset which are then reported in the financial
statements.
 It is in line with the standard of accounting. When the company uses the historical
approach for the purposes of valuing the assets or the liabilities, then it may not
always show the true and fair picture. The fact that this method is more reliable when
it comes to the valuing of the assets and the liabilities reported in the Annual Reports.
For example, $100 would not be worth $100, 5 years from now on (Marra, 2016).

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 This method also serves as a method in the difficult economy. When the historical
method if followed, then the value of the asset changes each and every year. When
there is a recession in the economy, then the changes in the historical prices somewhat
is difficult for the company. The method of fair value accounting helps in the
reduction of the prices of the assets within the market so that the business has a
chance of survival (Gaille, 2019).
Cons of the method:
 It leads to changes in the value that could happen many times. There are many of the
businesses that do not derive any advantage when it comes to using the stated method.
This is mainly due to the reason that their assets undergo a lot of change in their
values throughout the year. When there is a volatility in the value of the assets, then
the same could be reported in the statement of income that shows an accurate picture
of the company in long term. This could be misleading in the shorter period of time.
 In case, one business indicates a decrease in the net income, then this trend would
create a pattern which would indicate fall in the amount of the net income always.
Whenever there is a downward valuation, then that is somewhat contagious and leads
to selling which is due to volatility in the market. The not following of this concept
would then decrease in values do not take place and hence, there is more stability of
the investors. This would in turn keep the economy more stable.
 It loses the investors satisfaction. There are many investors that do not always notice
that the company has been using the fair value accounting concept and hence, it leads
to dis satisfaction for the investors since it means loss of income for them. Also, there
are many investors that trade in commodities when they should use these for
investment. It leads to the creation of a tough hit for their portfolio.