Question

Assume you are in support of the fair value basis as recommended by IFRS. Discuss why you think the fair value approach best values the long-term assets on the balance sheet. In addition, provide an example to support your position.

Answer 1

Fair value accounting is a financial reporting approach, also known as the “mark-to-market” accounting practice, under generally accepted accounting principles (GAAP). Using fair value accounting, companies measure and report the value of certain assets and liabilities on the basis of their actual or estimated fair market prices. Changes in asset or liability values over time generate unrealized gains or losses for the assets held and liabilities outstanding, increasing or reducing net income, as well as equity in the balance sheet.

Fair Value approach is good for long term asset valuation

• A primary advantage of fair value accounting is that it provides accurate asset and liability valuation on an ongoing basis to users of the company's reported financial information.
  • Example-For example, Company A sells its stocks to company B at $30 per share. Company B’s owner thinks he could sell the stock at $50 per share once. So this will help entities to improve asset health.
• Fair value accounting limits a company’s ability to potentially manipulate its reported net income. Sometimes management may purposely arrange certain asset sales.
  • Let us take an example of debtor who are not in mood of paying & the amount has pending from last 3 years. But due to significant value. Management do not intend to reduce it at once. that will lead to manupulation in income.
• Fair market value can increase the company’s asset value listed on its balance sheet. This increase is the result of assets appreciating in value under current economic market conditions. Asset increases improve a company’s total economic value added from business operations.
  • Increased value effect also impact profit part of entity
• Fair market value can provide companies with a few tax benefits. A decrease in an asset's value may be carried over to the company needs-to-come statement. This reduction results in a loss from the fair market revaluation.