Fair Value Reporting: Importance and Significance in Financial Statements

CORPORATE ACCOUNTING

FV
Part A- essay
The figures represented in the financial statements are based on calculations and estimations.
Therefore, in such scenario fair value reposting helps the users in deriving an understanding
from the organization’s financial statements so as to make appropriate decisions. Users of
financial statements get great support from fair value reposting which further allows them to
take substantial investment related decisions. The figures projected in the financial statements
entirely depend on certain expectations that are further based on a few calculations and
estimations (Merchant, 2012). Due to such expectations considering various risks it is highly
required. Fair value determination is a three-tier process for there is a strict preference given
to measures that are related to the market.
Currently, in the era of rapid globalization and innovation, complexity arises which can be
overcome with the means of using fair value as it adds more utility to the financial
information provided in the financial statements which further helps the users in taking
appropriate decisions. There is a lot of debate going on over the utility of fair value. Some
also label fair value in the controversial box owing to the need for various other estimates by
utilizing various inputs such as management’s expectations and other projections.
Taking fair value into due consideration, a new model is being developed which carries
measurable inference on the items of the B/S. Fair value allows ascertaining the current price
of an older transaction so as to dispose of certain assets and liabilities between the parties of
industry considering the current standards. Fair value, in other words, is the price at which a
liability could be settled between the parties of the market or an asset that could be exchanged
or changed in the present market scenario (McDonough & Shakespeare, 2015).
FVA has become a subject of debate ever since the financial crisis that took place in 2008.
The value of the underlying asset majorly determines the accounting and reporting of
derivatives type of non-financial assets. It is why there are consequences faced in the market
while reporting assets and liabilities at their determined fair value owing to the distorted
financial statements. The efficiency of the market solely determines the fair value of an older
transaction (Needles & Powers, 2013). Efficient the market, passing the tests shall be easier
and vice versa. The criticism revolving around fair value measurement is minimized owing to
the introduction of new AS. FV measurement helps in evaluating the price of even such
assets and liabilities that are harder to be traded on the liquid market.
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FV
With the revolution in IT in the recent 20 years, the significance of fair value is also
seemingly increased. Companies that earlier opted to prepare their statements on a basis other
than FV measurement are now considering it which can be seen as notes to their financial
statements. The need for fair value has also gone up due to the increasing innovations and
rapid globalization. The financial transaction over cross borders is also simple and hassle-free
as it saves a lot of time. Fair value makes a valuation of non – financial items a lot easier and
provides profound details that are required for acquiring or disposing of a financial asset. It is
very much recommended nowadays for it helps in computing the value of certain intangible
assets like goodwill. Fair value accounting has become popular and is in very much in
demand owing to its significance in AS in the rapid globalization and various innovations.
The significance of FVA in financial statements is huge owing to the globalization in the
economy (Peirson et. al, 2015). Amidst all this, it must always be remembered that FVA is a
set off between reliability and relevance related to the AS.
As per IASB/ FASB, FVA is inconsiderate of the price inefficient market conditions for the
evaluations of the transaction is amidst parties that are rational, skilled, knowledgeable, and
independent for they communicate with the motive of interrogating, providing and delivering
thorough information of the related transaction. This is because of the private details offered
by the market prices are more reliable than the details offered by the internal participants and
the items those are regularly traded on a liquid market most likely offers the best-desired
information owing to their market prices (Petersen & Plenborg, 2012). In the absence of such
information, one can take market prices of such items into consideration. It is necessary to
estimate the fair value on the basis of internal estimates and calculations when the above-
mentioned methods cannot be taken into use.
The economic view is the basis of valuation and is the key driver behind the techniques so as
to derive the fair value of a transaction. It is not always necessary that fair value
measurement encompasses the market tests in cases of all the assets and liabilities and this
becomes a matter of subjectivity. For instance, when a class of assets is purchased, it is
required for the Purchase Price Allocation to look for the difference lying amidst FVA and its
purchase price. This difference between the purchase price of an asset and its fair value needs
to be accounted as goodwill. It is absolutely true that the fair value of assets does not
necessarily pass the market test completely (YooChoi & Pae, 2017). Purchase Price
Allocation’s judgment is based on few assumptions which are rightly said in its own way and
therefore, the debate on the fair value of assets can be agreed upon to a certain extent for it is
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