Challenges of Fair Value Measurement, Depreciation, Provisions and Contingent Liabilities in Financial Accounting

Financial Accounting 1
FINANCIAL ACCOUNTING
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Financial Accounting 2
FINANCIAL ACCOUNTING
Introduction
This paper involves answering four questions on different topics. The discussion
challenges of fair value measurement shows that despite the new coming into practice of the new
accounting standard, which significantly tried to clear up uncertainty, the entire process,
however, of placing value on something further needs attention. The second topic discussed is on
PPE to understand the possible understatement of depreciation values at Safety Ltd as new
technology in the factory machine industry implies that such machines are becoming outdated
much faster relative to what the figures of depreciation suggest. The third topic examines
provisions, contingent liabilities and contingent assets at Sandy Ltd to understand how
guarantees should be accounted for in terms of measurement and recognition and effects on
financial statements. The last topic is on lease to understand the reasons why provisions are
recognized as liabilities while contingent liabilities are not recognized in financial statements but
on notes to the financial statement.
Question 1
Fair value has a lot of challenges. It is hard to compare when using fair value. This is
because once you select the method that is to be used in valuing the asset, it remains challenging
to change to another method or even revert to the cost accounting policy when using fair value.
While one can employ a continuing use in valuing asset, another company with an identical asset
might utilize highest and best use (Cannon and Bedard 2016). Thus, the fact that different
entities causes a gap in asset of similar type valuation comparability. Fair value also pose real
challenge in impaired assets valuation. This is due to the requirement for directors to assess the

Financial Accounting 3
impaired assets and observe if they stay at fair value with a real challenge being revaluing a
division of a business (Cain 2013).
The accountants and directors are never comfortable in valuing a division of a business.
This is a challenge specifically when valuing a goodwill attributed to a business. This has forced
many businesses to write down goodwill value acquired assets after following GFC. It is,
however, only possible to reverse other assets’ impairment in limited scenarios (Cain 2013).
Businesses do not like observing volatility in asset values and there is a real-push back on value
writing off. Fair value on is hard to use since there is a need for judgment to be used and asset
must be looked at in similar manner the market views it which creates several misunderstanding
regarding fair value.
Another challenge of fair value is too much judgment is involved when using it in
accounting. Many judgments are involved in fair value determination (Cain 2013). Thus, the
global economy is causing a constant move in the fair value due to its volatility (Glover, Taylor
and Wu 2016). This makes the FV to be a challenge since the manner in which FV requires
unrealized gains as well as losses to get treated never essentially reflect whatever the assent
implies to a specific business. While financial institutions utilize FV in valuing financial
instruments as part of daily business, when PPE is valued, roundabouts and swings are common
alongside changing valuations.
The requirement by AASB 13 directing financial accounting to preparers to utilize asset
market price considering highest alongside best use of the asset when determining fair value.
However, this possess a great challenge to for not-for-profit organization (Mgbame 2016). The
asset valuation inflation is a problem in FV specifically for not-for-profits which makes the