Relevance of Fair Value Accounting

Relevance of fair value accounting
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Contents
Part 1: Essay...............................................................................................................................2
Introduction............................................................................................................................2
Discussion..............................................................................................................................2
Conclusion..............................................................................................................................3
Part 2: Cast study.......................................................................................................................4
References..................................................................................................................................6
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Part 1: Essay
Introduction
The fair value accounting method allows for the estimation of the fair value of the liabilities
and assets helps at current market conditions. This helps track the gain of the value of the
liabilities and assets as they change over time and this helps to gain a greater understanding
of the value of the assets help by the company or their liabilities. This method while more
realistic that some of the other accounting approaches have its own shortfalls that caused this
method to be the centre of a debate regarding its relevance in the practical market conditions.
Thus, the argument of Laux and Leuz (2009) is valid in its purpose as the fair value might be
more accurate but is far from perfect.
Discussion
The fair value method is more relevant in case of the long term assets as the change of their
value of the asset based on the current market price allows the understudying of the true
worth of the assets which can be effective in measuring the conditions of the company. This
not only helps in the understanding the financial position of the company but also allows for
them to track the change of the values through the transaction (Alexander, Bonaci and
Mustata, 2012). This is an important point in the relevance of the far value method as this
method ensures there is no need to chart discrepancies in the event of a sale of the asset at a
market price which would be the same as the listed value in the fair value method. On the
other hand, the method is not universally applicable as the method itself depends upon the
market stability of the price of the aforementioned asset and thus inapplicable in case of the
assets that change value drastically over the course of a financial year (Taplin, Yuan and
Brown, 2014). This volatility of the market valuation of the assets inflates or deflates the
calculated fair price that often makes the valuation incapable of representing the long term
financial condition of the company. Thus, the effectiveness of the method is limited because
of its limited practical applicability. This gives credence to the claim of Whittington (2008),
as the purpose of the valuation seems to be main issues in this case as the effect of the price of
market price of the held assets are reflected in the company even for the assets that are
essential for operation and thus the fair value method can cause changes in the profit
statement that is irrelevant to the business operations and the profitability of a company. This
has consequences in the market as the devaluation of the market price for the assets are often
translated into the loss of income for the investors which result in unnecessary selling of the
assets which could have been used for future investments. This can cause a chain reaction in
a specific industry in a region in which cam n affect the market which them become self-
replicating and cause further devaluation (Palea, 2015). Therefore, a downward turn in the
valuation can cascade in the market that threatens the stability of the market. The fair value
approach, therefore, carries a limited risk while offering a significant benefit.
There are some financial analysts who argue about the role of the fair value approach in the
assessment of the true income of the companies. Their main reason is that the fair value
approach not only allows a transparent assessment of the income that leaves little room for
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