Fair Value Accounting

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FAIR VALUE
ACCOUNTING

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Fair value accounting:
The idea of fair value measurement is the estimation of price at which an asset or a liability
would be exchanged in the market in an orderly manner or fashion. This exchange would take
place between the different market participants and also, under different conditions that exists
in the market.
A disadvantage of this concept includes the fact that in case its implementation is incorrect
then the whole process which is included when the 3stimated price of the asset or the liability
is determined, fails in its entirety. This process of fair value accounting usually fails when no
relationship exists between the exit prices and the fair value of the shareholders. An example
of this is the fact the exit prices of the assets fail when the prices of these assets are dependent
upon the execution of any business plan rather than the market conditions etc. This holds
good even when the exit prices exists in the market. There have been evidences that even
when the SFAS 157 states that the exit prices have to be used for the assets, even then there
are times when either the value in use if the entrance values for those assets are used. This
defeats the use of the concept of fair value accounting. Then, the transaction costs that are
incurred for the purposes of calculating the fair values of the assets or the liabilities must be
logically be excluded when in reality these are not. The scholars have also expressed their
concerns about the use of the fair value since the valuation of the market prices depends upon
the market to market and this cannot be done in the irrational market or the market which is
exposed to high liquidity. Also, the use of the fair value accounting reduces the information
about the earnings of the company to the investors since the market prices fluctuates and this
makes the lira values unpredictable.
An advantage of the fair value accounting involves the fact that the concept is quiet straight
forward and the companies do not have much to say when it comes opposing the proposals or

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the prices. It becomes difficult for the parties to go for any alternative proposals. The
researchers are of the view that it becomes very difficult to present some credible resources to
find any other alternative way of determining the price that would go in line with the
concepts of relevance, reliability, comparability and understanding of the accounting
standards. The studies have found that both the securities as well as the derivatives held by
the companies conform to the fair value accounting concept. It further confirms with the
market prices of the securities that are available for sale as per SFAS 115. This concept also
helps in the determination of the fair values that are due from the people. Further the level 3
inputs that are calculated are based upon the various different models and this sort of
information us useful for the investors. The concept of fair value accounting helps in
predicting the future fair values of the assets or the liabilities and this helps in making the
future accounting earnings more possible.
3 tier process in fair value accounting:
This method includes a 3 tier process which includes the level 1 inputs to be the prices which
are not quoted in the market. These prices are unadjusted in nature in the active markets.
These exist for the items that are similar to the assets or the liabilities that are being measured
(Marra, 2016). As per the relevant and the current IFRS, in case, there is a quoted price of
that asset or the liability in the market, then that price would be considered even if it does not
confirm with the fair values of that asset or liability. In other words, the quoted price shall not
be adjusted for price fair values of that asset or the liability. An example of this is the pieces
of the financial security quoted on the stock exchange. For these prices to work, an entity
needs to have an access to the market as on the date on which that asset or the liability is
being measured.