Pros and Cons of Fair Value Accounting

Running head: FINANCIAL ACCOUNTING THEORY AND PRACTICE
Financial Accounting Theory and Practice
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING THEORY AND PRACTICE
Table of Contents
Introduction................................................................................................................................2
1. Pros and Cons of Fair Value (FV) Accounting......................................................................2
Pros of FV Accounting...........................................................................................................2
Cons of FV Accounting.........................................................................................................3
2. Explanation of the Three-Tier Process...................................................................................4
Qualitative Characteristics.........................................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Introduction
The concept of Fair Value (FV) accounting has gained massive popularity over the
last two decades. FV accounting involves in measuring the assets and liabilities at their
existing market value (Christensen & Nikolaev, 2013). This can be considered as the opposite
of the historical cost accounting where the assets and liabilities are measured at cost price.
There is a debate under the FV accounting that companies are needed to consider certain
aspects at the time to consider the investment selection and management decisions. This
essay undertakes the analysis of the provided article for exploring different dimensions of FV
accounting.
1. Pros and Cons of Fair Value (FV) Accounting
It needs to be mentioned that there are certain pros as well as cons of FV accounting
and they are discussed below.
Pros of FV Accounting
Benefits of Investors – The financial statements under FV accounting provides better
indication of the financial standings of the firms since it record the assets and liabilities at
their real value. This aids the investors in effective decision-making process in the
companies. Under FV accounting, the notes to the financial statements help the investors to
investigate the effects of fair value variation on the financial reports (Marra, 2016).
Net Profit Minimization – Under the FV accounting, organizational net profit decreases due
to decrease in value of the assets. Organizational net profit also decrease when there is
increase in the value of the liabilities. Net profit is the amount on which tax is deducted.
Since, decrease in less profit leads to decreased tax payment, it becomes an advantage for the
firms. At the same time, assets and liability increase leads to the decrease in business equity.
A firm possesses lesser money for their business operations in the presence of lower equity.