Question

Janice Corporation UK is public corporation which manufactures a technology. Janice uses fair value measurement for the measurement of all assets of its business. Required: In regard to the Janice Corporation UK, discuss the economic consequences concept which holds that economic practices which a company adopts may affect its security price and value. Discuss the pros and cons of fair value and make a recommendation to Janice Corporation UK and support your decisions regarding the measurement of company assets.

Answer 1

If a company adopts fair value measurement then it has a direct bearing on the security prices and value of the company, it is because if there is a slump in the economy and the prices are going downwards then there will be a contagious impact of such downturn in prices to the assets of the company also and as a result the valuation of assets of the company also starts falling as a contagious effect, which ultately leads to reduction in Net worth of the company which means shareholders find that there right on assets is decreasing and as a result they start panicking and starts selling their shareholdings which leads to reduction in share prices of the company. Thus, economic practice which the company adopts had a direct bearing on the prices and value of the company.

Pros of fair value measurement :-

1 . Accurate valuation of assets = Showing assets of the company on fair value allows the assets of the company to be shown at accurate values that is the values of the asset reflected in balance sheet is the true and accurate value of an asset.

2 . Avoids manipulative practices = Of share prices are shown at historical cost, company tends to revalue assets at random intervals and that too without any objective basis. But when fair value measurement is used such a manipulative practices by company cannot be used and assets are simply shown at the current market or fair value.

3. Reflects true income = Further company cannot revalue assets when it wants it's profit for the year to be more and when there is no such need leaves value of asset to be unchanged. And it has to compulsorily has to show assets at fair value in an unbiased manner.

Cons of fair value measurement :-

1 .Daily Changes in values of asset = In a volatile market state where prices of assets keeps on changing it only adds to the work of accountant as he has to focus on changes of value and then reflecting those changes in financial statements

2. Difficulties in valuation = In case of any specific asset which only a few company holds it becomes very difficult to find out the current market value of that assets and thus leads to utter confusion.

3. Unreliable valuation = What is the value of a particular assets is a very subjective term. As different persin may judge the value of asset differently and thus it is a very biased form of valuation and value obtained may not be that much reliable as a bit of element of judgement will always be involved in valuation of an asset.

Thus, aa a conclusion note it can be said that fair value measurement though may show the accurate value of an asset, but that value may contain some amount of biasedness. Also it leads to confusion and increases unnecessary burden on the staff of the company. This, it's better to use historical costing rather than fair value measurement of assets.