Question

Summarise why fair value is either an attractive OR unattractive measurement base in financial reporting.

Answer 1

FAIR VALUE : It is the sale price agreed upon by a willing buyer and seller , assumig both parties agreed upon the transaction with willful freely and knowledgably.

Every thing will have its own advantages and disadvntages( either attractive or unattractive). Therefore regarding fair value it also represents company assets and liabilities when a subsidiary company financial statements are consolidated with the parent company.

generally assets and liabilities are recorded at fair value to assess the company present situaton and reliability. the fair value of the assets and liabiities is the amount that which the company can realise the amount as on that date from its assets and liabilities.

Fair value accounting is an improvement to the traditional form of accounting – the historical cost accounting. Under historical cost accounting, the initial price paid by the company during the purchase of the asset or incurrence of the liability is the one that matters. The price reflected on the balance sheet either is the purchase price or at a value reduced by obsolescence, depreciation or depletion.

In both fair value accounting and historical cost accounting methods, the value of assets depicted on the balance sheet is always lower due to the depreciation, depletion and obsolescence.

In fair value accounting, the recognized values change from time to time, hence, higher volatility. Thisvolatility emanates because this accounting method summarizes “the stream of expected future cash flows: a change in expecting relation to any of the cash flow changes in the fair value. itt does not mean that volatility in financial statements refers to flaw in it rather than that it is the one anticipated.

unattractiveness in fair value acconting:

some of the entities or companies oppose the fair vlue acounting because it is difficult to ascertain the market value of the particular period and also as the economic cycle falls assets prices also falls results in depressing earnings for companies. for instance where secondary market or similar asset does not exist in market it is difficult to replace it or to find it fair value. since the fair value is a subjective method of accounting so the term fairness may not imply fair value because of subjectivity.