The Bright Side of Fair Value Accounting: A Critical Analysis

This discussion board post critically examines the concept of fair value accounting (FVA) and its application in the valuation of private companies. The post highlights the evolution of accounting to improve financial reporting, focusing on the shift from historical cost accounting to FVA, particularly within the context of International Financial Reporting Standards (IFRS). The analysis explores the benefits of FVA, such as improved valuation of investment portfolios, and cites research indicating a positive impact on the portrayal of an organization's financial position. It acknowledges potential drawbacks, like the possibility of overstating asset values, and emphasizes the importance of proper application. The post references key articles and research to support its arguments, providing a comprehensive overview of FVA's role in contemporary accounting practices.

Running head: CONTEMPORARY ISSUES IN ACCOUNTING
Contemporary Issues in Accounting
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CONTEMPORARY ISSUES IN ACCOUNTING
The Bright Side of Fair Value Accounting: Evidence from Private Company Valuation
Accounting as a concept has evolved since its introduction to improve the ability of
accounting information to portray the financial picture of an organization. The concept of Fair
value accounting (FVA) has been a hot topic of discussion for the accounting pundits. Many
have vocally supported the need for an alternative accounting concept to value assets, liabilities,
income and expenditure from the age old historical cost accounting. There are equally strong
critic to the concept though with many have claimed that the management are making unethical
use of the concept to window-dress the financial statements. However, the ability of the financial
statement prepared using FVA to portray the true and fair picture of an organization is beyond
any question provided it is used properly (Sedláček, 2016).
Cran, N. and Law, K. (2017) in their article have described the need for the private companies to
shift from historical cost accounting to FVA in order to ensure better reporting of financial
performance and position in the financial statements. International Financial Reporting Standards
(IFRSs) has been developed keeping in mind the need to shift to FVA from age old historical
cost accounting to improve the quality of financial reporting. Even there is significant research
by experts in the US also to adopt the IFRSs in order to enhance the quality of financial reporting
(Müller, Riedl and Sellhorn, 2015).
A 12% increase in the valuation of portfolio by investors has ensured proper valuation of
investment portfolios. Earlier portfolio managers used to value the investment portfolios with
very conservative approach. With the 12% increase, the estimation and t-statistics have improved
to 0.079 and 2.71 respectively to improve the portrayal of true and fair picture of an
organization. Thus, the tendency of portfolio managers to value portfolios too conservatively has

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CONTEMPORARY ISSUES IN ACCOUNTING
been reduced to a large extent. A reduction of $8.59 million in the bias of the portfolio managers
to value the portfolios with18% reduction subsequent to the implementation of FVA has
significantly affected the valuation of portfolios (Magnan, Menini and Parbonetti, 2015). The
findings from the research suggest that the valuation of investment portfolios by portfolio
managers has improved by 48% with an estimated coefficient 0.391 subsequent to the use of
FVA. However, the only short coming of the concept of FVA is the possibility of overstating the
profit and value of assets as the increase in value of assets is recognized even when it is not
realized. Thus, while using the method it is important to ensure that the investments are not
overvalued (Crain and Law, 2017).
A large number of samples from private equity managers showed that the use of FVA has
significant impact on the value of private companies. Fund managers started updating the value
of portfolios with much more regularity with the use FVA standards. The estimated coefficient
of 0.391 also proved that the rate of error and volatility in the valuation of portfolios have
reduced significantly. The positive impact of FVA on financial reporting is very much clear from
the improved valuation of investments as understood from the above discussion (Hull and White,
2014).

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CONTEMPORARY ISSUES IN ACCOUNTING
References:
Crain, N. and Law, K., 2017. The Bright Side of Fair Value Accounting: Evidence from Private
Company Valuation.
Hull, J. and White, A., 2014. Valuing derivatives: Funding value adjustments and fair
value. Financial Analysts Journal, 70(3), pp.46-56.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Müller, M.A., Riedl, E.J. and Sellhorn, T., 2015. Recognition versus disclosure of fair
values. The Accounting Review, 90(6), pp.2411-2447.
Sedláček, J., 2016. Comparison of Valuation of Financial Instruments according to the
International and Czech Accounting Standards in the Context of Performance
Reporting. Financial Assets and Investing, 7(1), pp.33-49.