Question

Write a 350-to 525-memo to the client explaining the essence of fair value reporting and identifying primary concerns associated with it. Make a recommendation to the client as to which type of pension plan they should implement and why.

Answer 1

Answer:-

Reporting Paper

Name

ACC/541

Date

Instructor Name

MEMORANDUM

TO:Chief Executive Officer

FROM: Financial Controller

DATE:

SUBJECT:- Essence of Fair Value Reporting and its primary concerns,

Fair value reporting is an important part of financial disclosure. During this process, companies must determine the fair value of assets and liabilities at the date of acquisition and subsequently test for impairment after that. Additionally, certain entities must also mark-to-market their investments on a quarterly basis

Both the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) have been dealing with the issue for a number of years and have promulgated a number of standards requiring fair value accounting for selected (largely financial) assets and liabilities. Some of those standards have been controversial, but the discussion today also involves the question of whether fair value accounting should be extended to a wider set of assets and liabilities now carried at historical cost. For which types of assets and liabilities are fair values appropriate and which are best left at historical cost? A conceptual framework that directs when fair value accounting is appropriate is needed, and at present none exists.

Essence for Fair Value accounting for preparation of financial reports:-

1.Accurate 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.

2.True Income

Fair value accounting limits a company’s ability to potentially manipulate its reported net income. Sometimes management may purposely arrange certain asset sales, for example, to use gains or losses from the sales to increase or decrease net income as reported at its desired time.

3. It is the most agreed upon standard of accounting.
Instead of the historical cost value that isn’t always accurate after a long period of time, fair value accounting accurately tracks all types of assets, from equipment to buildings to even land. This makes it the most agreed upon standard of accounting because set prices, even if still accurate in value, aren’t the same because of monetary inflation. $10 today is not worth the same $10 from 1992. That’s why fair value can be so beneficial.

4.It provides a method of survival in a difficult economy.
In the historical method, the same value goes of an asset goes on the budget line every year. When there’s a difficult economy and prices are reduced, this can become a cumbersome financial burden. Fair value accounting allows for asset reductions within that market so that a business can have a fighting chance.

Primary Concerns Associated with it :-

1.Value Reversal

Fair value accounting can also present challenges to companies and users of reported financial information. Conditions of the markets in which certain assets and liabilities are traded may fluctuate often and even become volatile at times. Applying fair value accounting, companies reevaluate the current value of certain assets and liabilities even in volatile market conditions, potentially creating large swings in the value of those assets and liabilities.

2.Market Effects

The use of fair value accounting may further affect a down market adversely. For example, after an asset has been revalued downward because of drops in the current market trading prices, the lower value of the asset could trigger greater selling of the asset at a potentially even more depressed price

3.Less Reliable

Accountants may find fair value accounting less reliable than historical costs.

For example, accountants typically look to the market when finding a new value for assets or investments. When an item has different values in different regions, however, accountants must make a judgment call on valuing items on the books. If a company with similar assets or investments values items differently than another, issues may arise because of the accountant’s valuation method.

B. Recommendation to the client as to which type of pension play they should implement and why :-

Answer:-

A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement

There are two main types of pension plans..

1. Defined Benefit Plans

2. Defined contribution Plans.

Explanations:-

A defined retirement benefit plan

• Funded by the employer.
• Promises employees a specific monthly benefit at retirement.
• Often calculates employee benefits based on tenure at the company and age at retirement. Pension benefits will equal a percentage of an employee’s income at a designated time.

A defined contribution plan

• Does not promise employees a specific benefit amount at retirement.
• Employers and employees contribute money to the employee’s individual account in the plan.
• In many cases, employees are responsible for choosing how these contributions are invested, and deciding how much to contribute from their paycheck through pre-tax deductions.
• Employers may add to employees’ accounts, in some cases by matching a certain percentage of employees’ contributions.
• The value of an account depends on how much is contributed and how well investments perform.
• At retirement, employees receive the balance in their account, reflecting the contributions, investment gains or losses and any fees charged against their account.

The type of Plan which would be recommended to the client is  defined-contribution plan,

Because In a defined-contribution plan, the employer makes specific plan contributions for the worker, usually matching to varying degrees the contributions made by the employees.

The final benefit received by the employee depends on the plan's investment performance: The company’s liability to pay a specific benefit ends when the contributions are made.

Because this is much less expensive than the traditional pension, when the company is on the hook for whatever the fund can't generate, a growing number of private companies are moving to this type of plan and ending defined-benefit plans.

The best-known defined-contribution plan is the 401(k), and its equivalent for non-profits' workers, the 403(b)

.