Fair Value Accounting: Pros and Cons

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

FINANCIAL ACCOUNTING THEORY AND PRACTICE1
Table of Contents
Introduction................................................................................................................................2
1. Fair Value Accounting: Pros and Cons..................................................................................2
2. Three-Tier Process.................................................................................................................4
3. Qualitative Characteristics of Financial Information.............................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

FINANCIAL ACCOUNTING THEORY AND PRACTICE2
Introduction
Fair value (FV) accounting is considered as a specific measurement process where the
companies are needed to record their assets and liabilities in the existing market prices and
thus, it becomes able in capturing the changes in the values in assets and liabilities over the
time (Singh, 2015). Significant popularity of fair value accounting is there in the present days
since it has become a more accepted measurement approach over the historical cost
accounting. The main aim of this essay is the analysis of different aspects of fair value
accounting while considering the provided article.
1. Fair Value Accounting: Pros and Cons
It is needed for the accountants of the companies to consider both the advantages and
disadvantages of fair value accounting and they are mentioned below.
Pros
1. The application of fair value accounting contributes towards the organizational assets’
value reduction that is responsible for the decrease in net profit. Reduction in the
value of liabilities is also responsible for the fall in net profit. Companies are needed
to apply taxation on their net profit. It creates an advantage for the companies when
they have to make less tax payment as a result of fall in net profit. Moreover, business
equity tends to decrease in the presence of asset and liability increase. Lowe equity
required less amount of funds for the companies for securing their business
operations. It leads to the decrease in staff bonus that supply more fund to the firms
(Marra, 2016).
2. Due to reporting the assets and liabilities in the current market prices, fair value
accounting ensures better depiction of the financial performance and position of the
firms through the financial reports. This helps the investors in understanding the