Question

: Answers should be substantive and include consideration of relevant accounting concepts

Most assets and liabilities are reported on the balance sheet at their acquisition cost, called historical cost. Would reporting assets and liabilities at fair values be more informative? What problems might fair-value reporting cause?

Answer 1

Problems might fair falue reporting cause are

1. Large swings in value - Applying fair value on asset and liabilities potentially create large swings in value of those assets and liabilities. Sometimes it can bring a huge profit as well as a huge loss to the organisation. It sometimes provide misleading information to the users of financial statements.

2. Manipulation of accounts - Adoption of fair value reporting of assets and liabilities would considerably increase ablitity of managers to manipulate the accounts of company

3. Lower objectivity - Major problem of fair value reporting is that it is less reliable as it lacks objectivity.

4. Limited reliability - Financial information provided in financial statements provided by fair value reporting is relevant and reliable for a limited time period. As information included in financial statements is time specific for a given market conditions a change in market conditions can cause a major difference in actual financial position of the firm.

5. Price Deviations - Another problem of fair value reporting is vagueness of measurement procedure of asset for financial statements which create loopholes for pricing deviations.