Fair Value Accounting Is Worth Being Used - 1962 Words

There have been many debates in previous decades amongst the investors, users of the financial statements, on whether fair value accounting is worth being used. According to IFRS 13, fair value is â€Å"the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date†. Usage of fair value has advantages, however, it has disadvantages as well. This essay will discuss how fair value is more advantageous than disadvantageous and how it is carried out. It will also examine how fair value led Lehman Brothers, an American investment bank, into bankruptcy during the global financial crisis and why the trend of fair value has emerged in the recent decades.†¦show more content†¦This is beneficial for the investors as it means that they can be confident that their decisions are correct and that the finances of the business will not suddenly change. Bubble prices can be an issue for investors as it may mislead them into making poor investing decisions. There is plenty of empirical evidence to show that bubble prices exist (Ryan, 2008). These price bubbles, according to Penman (2007), are introduced into financial statements through the usage of fair value accounting. He goes on to say that this causes bubble gains to reflect on the income statement, and these may, falsely, show the company as being healthy which could lull investors into a false sense of security. These bubbles also result in the investor receiving ineffective financial statements which will impair their decision making. An example of this would be where investors pay prices that far exceed their own valuation (Scheinkman and Xiong, 2003). This would make it tough for investors to earn a reasonable return on their investments. However, the research fails to consider the difficulties locating price bubbles or how investors can prevent themselves from being misled . It also fails to consider that bubble prices show the current trading price, albeit inflated, and therefore show the true value of the investment according to current prices. When there isShow MoreRelatedThe Financial Accounting Standards Board1621 Words   |  7 PagesFinancial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157: Fair Value Measurements (FAS 157) to provide guidance about how entities should determine fair value estimations for financial reporting purposes. These guidelines coincide with the conceptual framework and provide a baseline for accounting professionals to gauge the true worth of an asset. 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One of the important concept in accounting is â€Å"Measurement† (Mattessich, 1977) The IASB Framework states: â€Å"Measurement is the process of determining the monetary amountsRead MoreDefining Fair Value Essay1280 Words   |  6 PagesRevalued amount is fair value at date of revaluation less subsequent accumulated depreciation and impairment losses (Touche, 2009). Canadian and U.S. GAAP use historical cost as the basis of measurement for property, plant and equipment (Touche, 2009). Revaluations are prohibited in both Canadian and U.S. GAAP (Touche, 2009). So what does that mean for companies not sure of what to choose or needs guidance? Even when a particular IFRS lacks guidance, the application of the IAS 8 Accounting Policies, ChangesRead MoreUsefulness and Reliability of Information Provided By Corporations1474 Words   |  6 Pagesusefulness and reliability of information provided by corporations. The financial accounting standard board defines usefulness as the information that is useful for the users in decision making (FASB, 2011). Reliability is inferred when the informat ion is verified, objective, and can be relied on. Therefore, Statement of Financial Accounting Standards No. 157 standardizes the valuation and disclosure of fair value for assets and liabilities in order to achieve both usefulness and reliability. TheRead MoreRevaluation Assets1679 Words   |  7 PagesThere are still many differences in accounting treatment between International financial reporting standards (IFRS) and the U.S Generally Accepted Accounting Principles (GAAP). While IFRS are widely used by many countries around the world, FASB of the U.S still working on the intention of either adopt the IFRS or converge towards it. Until the convergence actually happens, there are still many critics about the accounting treatment at the same subject under U.S GAAP and IFRS. Example of this is the