Pros and Cons of Fair Value Accounting

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
a. Pros and cons of fair value accounting (FVA):......................................................................2
b. The three-tier process:............................................................................................................4
c. Qualitative characteristics of financial information:..............................................................5
Conclusion:................................................................................................................................6
References:.................................................................................................................................8

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Introduction:
Theory of "fair value accounting" is being practiced for over the last two decades. The
conception of this process is to evaluate "assets and liabilities" at its present price. It is a
notable drift away from the reality, that the balance sheets are required to be examined at its
real cost and not at the " present price". Furthermore, this theory leads into an argument, as
specific elements are required to be considered for venturing into investment preferences and
management decisions. This project would be aiming at analysing the factors regarding "fair
value accounting (FVA)" by typically evaluating this given scholastic piece.
a. Advantages (pros) and disadvantages (cons) of fair value accounting (FVA):
As stated by Ayres, Huang & Myring (2017), "FVA" is a sort of book-keeping
concept where the corporations quantify as well as report their "assets and liabilities" at
values that are analogous to the flow amounts. The gains from "FVA" are depicted below-
Minimised net profit:
During the utilisation of "FVA", when the value of an asset declines, net profit of the
corporation also falls. Although, a hike in value of liabilities, the estimated net income of the
company also reduces. Net income marks the sum on that the business acquires tax. It is
acknowledged to be a gain for the organisation, as lower net income points to lesser tax
disbursements. Identically, rise in "assets and liabilities" contributes to reduction of "business
equity". When there is lesser "equity", a company suffers from lower sum of cash to decide
for its business functionalities. This results a reduction in the payment of bonuses to the
employees and allows the company to preserve more cash (Bewley, Graham & Peng, 2018).
Realistic financial statement:
The utilisation of FVA provides the organisations with a precise "operating
statement" contrary to those not applying the system. Concurrently, the "assets and liabilities"