Pros and Cons of Fair Value Accounting in Financial Accounting Theory and 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
Introduction:...............................................................................................................................2
Pros and cons of fair value accounting (FVA):..........................................................................2
The three-tier process:................................................................................................................4
Qualitative characteristics of financial information:..................................................................5
Conclusion:................................................................................................................................6
References:.................................................................................................................................7

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Introduction:
The theories of fair value accounting (FVA) have been followed in financial
accounting for a long time, which mandates above the past two decades. The concept of
"FVA" helps in measuring assets and liabilities with respect to their current worth. This has
been a noteworthy modification of the reason that the books of accounts requires to be
evaluated at actual price and not at their current worth. Moreover, these ideas lead to
controversies, as few of the elements are needed to taken care of in terms of alternatives
regarding financial propositions and management decisions. The current study would
examine the different types of features regarding "FVA" by minutely assessing the given
academic article.
Benefits and drawbacks of fair value accounting (FVA):
According to Barth and Landsman (2017), FVA is a type of accounting where the
companies measure and address the assets and liabilities at costs, which are similar to their
equitable rates. The advantages of this process are discussed below:
(i) At the time of applying FVA, when the rate of the assets decline, the net profit of the
company diminishes. Even with the raise in the rates of the liability, the computed net profit
of the company declines as well. Net profit means the sum on which the company has to
sustain the payment of tax. This is treated as an advantage for the organisation, as curtailed
net profit means lesser payment of tax. Likewise, the outcome of rise in the assets and
liabilities is decline in the equity of the company. When there is lower equity a company has
to send lesser money on its daily activities. The outcome of this is lesser payment of bonus to
their employees and more money is left in the account of the company (Amel-Zadeh, Barth &
Landsman, 2017).