Fair Value Measurement: A Deep Dive into Accounting Standards

This essay provides a detailed overview of accounting standards related to fair value measurement. It defines fair value as the price expected from the sale of an asset or transfer of a liability in a standard market transaction. The essay emphasizes the importance of these standards in regulating asset valuation and ensuring equality in the measurement process. It highlights the role of market participants, the consideration of credit risk through debt and credit valuation adjustments, and the ethical guidelines accountants must follow, such as accountability, responsibility, and truthfulness. The essay also touches on the significance of these standards in providing accurate information to investors and creditors, concluding that accounting standards of fair value measurement are essential policies for conducting fair and ethical valuations of assets and liabilities, as regulated by bodies like the International Accounting Standards Body.

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Accounting Standards of Fair Value measurement
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Accounting Standards of Fair Value measurement
Accounting standards are rules put in place with either national body or international body for
the accountants to follow during the accounting process (Tucker, 2002, p. 42). Mellemvik (2010,
p. 169) has defined the accounting standards as the rules or ethical principles that have been created
and enforced with a mandated body either internationally or nationally to define the accounting
practices and policies. The fair value is the value that is expected when an asset has been sold or the
money paid when a liability is transferred into a common transaction at the measurement date by
participants in the market (Adhikari & Mellemvik, 2015, p. 123). Therefore, the fair value
measurement is an alternative measurement approach which has the sole purpose of knowing the
changes in the value of liability and assets which occur time to time in the market. The measurement
of value of assets also needed to be regulated and that is where the accounting standards of fair value
measurement comes in. Kuruppu & Matilal (2016, p. 227) define the accounting standards of fair
value measurement has the principles that have been put in place to guide how the measurement of the
value of assets and liabilities in the market which happen from time to time is done.
Fair vale measurement depends on the up-to-date market value in coming up with the value of
liabilities or the assets (Ali, 2018, p. 1). In order to determine the fair value of an asset or liability,
the market participants must consider the current prices in the market that is currently active. The fair
value measurement is very significant when selling or acquiring a business or company; the
participants determine the value of the acquired asset through the market approach. Ball (2014, p. 5)
explains that in order for the fair value measurement to take place smoothly in that the participants do
not conflict, there must be standards and principles that guide the process and the principles are
illustrated in the accounting standards. The accounting standards require the market participants to
consider the credit risk when calculating the fair value of asset and liabilities (Tucker, 2002, p. 42).
Bohušová & Blašková (2013, p. 44) defined credit risk as the default risk that arises when
a person who borrowed finances has failed to pay the borrowed debts. Ali (2018, p. 1) has further

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explained that in credit risk, the lender can lose the interests and principal, the collection costs of
debts and also increase and lastly the lender’s cash flows can be disrupted. Ball (2014, p. 5) the
market participants involved in fair value measurement, when considering the credit risk should
calculate the debt valuation adjustments and credit valuation adjustment on their derivatives when
measuring fair value. According to Kuruppu & Matilal (2016, p. 227), credit valuation adjustment
is the difference between the value of risk free portfolio and the value true portfolio that considers the
other parties’ credit default. In other words, the credit valuation adjustment can also be explained as
the value of the market of credit risk of the counterparty according to Bohušová & Blašková (2013,
p. 44).
The accounting standards have also outlined the ethics and code of conducts the accountants
should follow then measuring the fair value of assets and liabilities (Ali, 2018, p. 1). The
accountants must always comply with all the procedures that are put in place by the accounting
standards body in fair value measurements. One of the policies is that, when measuring the fair value
of assets and liabilities, the accountants must refer to the prices of those assets in the current and
active market. Kuruppu & Matilal (2016, p. 227), also pointed out another policy that the
accounting standards requires the accountants to follow which the credit risk of the person who want
to sell the assets. The accounting standards also require the accountants to look at the historical costs
of the assets and liabilities when measuring the fair value of those assets. Accounting standards of
fair value measurement ensures that there is equality in the process of measuring the fair value of
assets and liabilities (Tucker, 2002, p. 42).
Ethics in accounting standards of Fair Value Measurement
The accounting standards have outlined some of the ethics that govern the accountants in
measuring the fair values (Adhikari & Mellemvik, 2015, p. 123). The ethics include;
accountability- accountants should do the fair value measurement while knowing that they must be
accountable for anything that will happen. Second, the accountants should calculate the fair value of
assets and liabilities while knowing that they will be responsible for the outcome of the

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measurements. Third, the accountants must be true and fair while measuring the fair value of assets
and liabilities for their clients. The accountants should not temper with the financial report for the fair
vale measurement to favour one party (Ali, 2018, p. 1). The reports should show true and fair details
of the results after fair value measurement. The ethics that are provided for by the accounting
standards o fair value measurement help the investors to have accurate information which can help
them in making sound investment decisions. The accounting standards of fair value measurement also
help the creditors to get the money they lensed before one of the participants sells the assets and
liabilities (Tucker, 2002, p. 42).
Conclusion
In conclusion, according to Bohušová & Blašková (2013, p. 44), accounting standards of
fair vale measurement are the policies and principles that the accounting bodies have put in place to
help the accountants and other stakeholders in conducting the fair value measurement of assets and
liabilities. The standards also outline the code of ethics the accountants must follow when helping the
investors and the people who want to sell the assets and liabilities. Kuruppu & Matilal (2016, p.
227) have explained that the accounting standards are provided by the bodies that have been given
mandate, bodies like the International Accounting Standards Body who are mandated to regulate
accounting of fair value measurement worldwide (Adhikari & Mellemvik, 2015, p. 123).

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List of References
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development. Review of Accounting and Finance, 1(3), pp.42-53.
Mellemvik, F., (2010). The adoption of IPSASs’ accounting standards of fair value
measurement in South Asia: A comparative study of seven countries. In Research in
Accounting in Emerging Economies (pp. 169-199). Emerald Group Publishing Limited.
Adhikari, P. and Mellemvik, F., (2015). The concept of accounting standards of fair value.
Journal of Accounting in Emerging Economies, 1(2), pp.123-143.
Kuruppu, C. and Matilal, S., (2016). Fair Value in Accounting Standards. The journal of
Accounting Forum (Vol. 37, No. 3, pp. 213-230). Elsevier.
Timoshenko, K. and Gårseth-Nesbakk, L., (2017). The importance of accounting standards to
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Ali, M.J., (2018). A synthesis of empirical research on international accounting
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Ball, R., (2014). International Financial Reporting Standards (IFRS): pros and cons for
investors. Accounting and business research, 36(sup1), pp.5-27.
Bohušová, H. and Blašková, V., (2013). In what ways are countries which have already
adopted IFRS for SMEs different. Acta Universitatis Agriculturae et Silviculturae
Mendelianae Brunensis, 60(2), pp.37-44.