Question

SFAS No. 159 (see FASB 825) allows companies to value financial liabilities at fair value. If not elected, financial liabilities will continue to be accounted for under the historical cost model. In at least three paragraphs, support the position below.

Position #1: Present arguments in favor of measuring liabilities at fair value.

Answer 1

Fair Value accounting refers to the ways and methods the company employes in order to measure its assets or liabilities in its current value in the market. The biggest benefit of using a Fair value accounting is that it it gives the upto date asset and liability valuation on an ongoing basis. The company using the Fair value accounting either marks up the liabilities according to their present value or marks down should there be any reasons contributing towards the conclusion. By looking at this, the prospective shareholders , investory, regulatory agencies, lending institutions, etc would be in a better position to understand the current position of the company.

It further ensures that a company presents the true value of Net Income. Analysing the Net Income is one huge factor driving the the decisions of the various stakeholders involved in the company. Using the fair value accounting, all the assets and liabilites are measured and displayed at their current values so that the company does not have any scope to promote artificial numbers to show a positive position. For example :- The $10 due today would not have the same worth as it was during $2012

Measuring liabilities at fair value enhances the informative power of the financial statements as opposed to traditional method of accounting - historical cost. Since it requires extensive documentation about the methodology used, the assumption made, contingencies, risk exposures, it gives a detailed and exhaustive overview of the obligations of the company so that the reader of the financial statement is well informed and can take appropriate decisions.

The fair value of reproting liabilities provides timely information for the specific and current market conditions. Disclosures, are added as necessary for any changes in fair value and would help the business to take prompt corrective actions. Also, since it accurately tracks the latest information from time to time, we see that many business houses prefer the Fair Value method as a modern technique in preparing the financial statements these days.