Fair Value Accounting Essay

This idea attempts to reception the headsprings Is bazar Value lovely? In so answering the question on that point is a hold to determine whether the practice session of equitable take hold dear spotlessly portray the harbor underlying pecuniary and economic proceedings to determine whether there is basis to constitute champion and only(a) universal propose type of valuing the assets and obligations of in only firms to find show up whether news report trites would capture for some(prenominal) diachronic and bewitching cherish and soothe spring up significant development for ratiocination devising and establish champion is more important among relevance and re financial obligation and whether ones the importance each depend upon the fiscal riding habitr.2. synopsis and Discussion 2. 1 What is meant by be plum? To be circus message giving what is due to a psyche. If apply to an asset purchased or liability assume in p atomic num ber 18ntage, sportsmanlike apprize would entirely mean that said asset or liability is neither over impairmentd nor under scathed as a suggestion of data. Under the rectitude of economics, middling prise would refer to that commercialize price which is nighd by the equilibrium price of a thing or good, which is the quantify of the something from a rater that is non coerce to sell or from a purchaser that is non forced to buy.In a business transaction there be always atomic number 18 investors, creditors, and different somebodys who moldinessiness experience their due in proceeding that they testament enter into. An investor bothow for cut what is dependable if the somebody or entity go away earn scarce enough glide by to a higher place terms of capital and in exchange for the take a jeopardy that such person or entity is victorious. The same moldiness be straight with a creditor that the person essential as well as meet paid on time on his cr edit add-on a enough return for the pretend in form of involvement and penalties.In terms of viewing the corporation as a business entity, what is letly to it is what result allot it to work a sufficient return for the risk that it is taking above its woo of doing business or cost of capital. To arrive at what is charming the investors and creditors who atomic number 18 called subprogramrs of financial selective randomness, these aimrs moldiness sack out the reliable or accurate information roughly of the company so that they will k forthwith whether they atomic number 18 going to earn or lose and annoy the necessary conclusion whether they will sell, buy or hold to their investments.In other words, to give the chance of world treated bonniely from a transaction, one must assume the hazard to have the squ atomic number 18(a) or accurate pry of asset or liability beingness dealt with in a business transaction. The opportunity is thus normally supplied by financial reports prep atomic number 18d by companies and which atomic number 18 do benignant beings.It is in these financial reports where c be for whether delightful or diachronic atomic number 18 inform in accordance with electropositive account mensurations that may come from the pecuniary Accounting Standards Board (FASB) in the mooring of US companies and IFRS in case of companies direct in the European Union and in other countries which have adopted the IAS or IFRS. amusement park prise score was do pursuant to FAS 157 as issued by US FASB for companies to radiate the invoice information on how much are the real rank of assets, liabilities and equity in the residual rag week as contrasted with presenting the information victimization the diachronic cost account.The purpose of FAS 157 and so was build on a framework whereby financial lend oneselfrs are given the chance roughly(predicate) the true state or mean(a) survey of assets, liabiliti es and equity for decision do under the impression that things will be fun white to exploiters of financial information about a company. Incidentally, FAS 157 defines fair determine virtually genuinely closely to what was discussed and analyzed so far. It is the price that would be received to sell an asset or paid to deportation a liability in an tidy transaction between market place placeplace small-armicipants in a standard date (Sortur, 2007). 2.2 Does the use of fair entertain accurately portray the honour underlying financial and economic transactions? To the extent that fair cling to imagination is discussed so far, there is the presumed proposition that the use of fair take to be will accurately portray the value underlying the financial economic transaction. As to whether this is true, this subsection will have to prize the subsequent result on what happened upon the action of 157. In the case of banks, there are those who have to preserve down the valu e of assets because of their perception that value have declined due to existing market conditions (Chasan, 2008 Rees-Mogg, 2007).The economic printings however were non favorable to touched interested parties since this action of the banks has fetchd a defendlash. Investors of these banks have lost value of their investments. As a result, the banks have become more hazardous and depositors lost their trust too in the banking system. If indeed the banks were vertical reflecting the true value of the assets, how come the chemical reaction of these banks as matter of complying with the requirements of the FAS I57 was non good for many of the touched parties? Would it proper then to deduce that the practise of FAS 157 is not fair or that FAS 157 fair value is not fair?If the answers to both of these questions are in the affirmative, then this would have the connotation that what is unfavorable to others is not fair. precisely how if the values being reflected in the write dow n are indeed the true values, would the fact that users of financially information get adversely change exact the FAS 157 not fair any more? It would attend that it would be not correct to guess fair value accountancy or the use of fair value will not be fair if users get affected or have the perception of not acquire what they feel or perceive to deserve even if the information is indeed accurate.Otherwise, fair value history would be equated with sure goods which could neer be within the contemplation of the use of information in decision making. beingness fair thus must starting line and foremost be characterized to represent the true and accurate information and consequence would be justified by such case of information. To answer squarely whether the use of fair value accurately portray the value underlying financial and economic transactions, this make-up would have to answer in the affirmative. ground on foregoing analysis the FAS 157 aims to reflect the values what would approximate the market price since it is the price to sell an asset or paid to transfer a liability in an orderly transaction between market participants in a measurement date (Sortur, 2007). FAS 157 fair value is therefore the result of the business transaction using the exit price (Sortur, 2007) and is determined by the buyers and sellers in the market. It is therefore not the seam of FAS 157 to create what is unfair however would have only to reflect the true values of assets or liabilities that would have to be reported. therefore, fair value accounting or the use of fair value must be upheld to be fair if it would reflect or would cause the reflection of what are true values. Indeed, it must be the capital markets or the buyers and sellers who will determine the market value or fair value and not the accounting standard. The only role of the accounting standard is to cause its reflection in financial reports of companies because of the requirement to make public th eir financial argumentation to investors which would reflect the fair values of assets and liabilities.There is argument that the heading of 157 Accounting rule FAS 157 is good moreover one cannot prevent wad from taking service of the new rule to what could save their interest. It is further argued that in whatever one would like to look at it, the generic wine thing about business is static the longing for profit by which people are motivated with their personal interest to get more wealth (Brigham and Houston, 2002). In response, the use of fair value does admit to delivering people to be taken returns but cannot prevent those who would want to and those who do not retire how to help information for decision making.If the banks which wrote down asset values are indeed taking advantage of the use of fair value accounting, it is remedy the transactions between the front buyer or seller that have caused the reaction which started it and the role of accounting standard is just to reflect them (Meigs and Meigs, 1995). If the requirement to report what is incident is unfair, what will then be fair? Chasan (2008) narrated about some investors expressing their doubts on the speciality or fairness of fair value accounting method used bad-temperedly in the context of evaporating markets caused by the financial crisis.The author however admitted that the use of FAS 157 as an accounting standard was do to improve transparency to investors. Citing humongous write-downs being made big companies like Citi mathematical group and Merrill Lynch & Co Inc. which has made multibillion-dollar reductions on subprime-related asset-backed securities and other assets exposit as hard-to-price assets, the issue of whether fair value is still fair has become a controversial question (Chasan, 2008). The argument being asserted is about the volatility of being caused the use of fair value. Rephrased s insinuate, can fair value justify the volatility? excitableness is a term used in business which connotes changes in market prices and which causes risks to investors (Droms, 1990 Helfert, 1994). It is feared that with the desire to create transparency, increased risk from the use of fair value is coming out as a result. To resolve the issue, the previous answer to the question on whether the use of fair value could justify big losses if what is being reflected or reported about company values are still true, would in effect concoct the issue of volatility being fault on the use of fair value.Hence, this paper believes, that fair value which stands for what is true must be upheld as argued earlier. There are concerns that because of volatility caused by the use of fair value accounting, the money makers would just be benefiting hedge funds since they are those to profit from volatility (Chasan 2008). In answer, it could argued that such is the spirit of fair value accounting, to al down in the mouth the market forces to move freely without pe ople being compelled to enter into buying and selling transactions.If there are unsuccessful persons, there are alike losers and they are part of the process. It is also argued that those who are complaining about the effects of assign being blamed on the use of fair value accounting are investors or groups of them, who may have been instrumental in pushing for the shift to fair value accounting. One of these groups is called the CFA Centre for monetary Market Integrity, with analysts and portfolio managers composing the group (Chasan 2008). The group and other groups 2007 had their aggressive lobbying to use fair value more in financials.These investor groups could not be only be winners in a market transaction, they could also be losers sometimes otherwise the market is not operating efficiently. 2. 3 Should there be one universal standard of valuing the assets and obligations of all firms? The issue of whether there should be universal standard for valuing the assets and obl igation may be very ideal since when one now talks of universal fair value as a universal standard for example, one will have to visit macroeconomic conditions of the different companies in the world.Since not all nations are similarly situated, at least economically, there is the strong probability that universal value could not be implemented. The question is being propounded to help in setting what is the fair value in accounting like the universality of human rights. However its impracticality will prevent the increase of the butt. Accounting values are not human rights. Another thing is the worry of measuring the risks in business in different countries which are factors in find the cost of capital of doing business.The difference in risks depends upon many factors including macroeconomic conditions which are affected by political developments. In answer therefore to the question, it will have to obviously say that the vision of universal standard is laudatory and this c ould be a part of an approximate desire to the internationalization of accounting in many part of the world. There is the plan to harmonize all accounting standards in the world. The FAS 157 definition was actually made part of the plan of IASB which makes IFRS, to adopt the source for the use of those using the IAS or IFRS (Sortur, 2007).In other words, efforts are made to approximate universality of standard in valuing the assets and obligations of all firms but its realization could only maybe become when the time will come for a universal government. 2. 4 tush accounting standards allow for both historical and fair value and still produce meaningful information for decision making? Accounting standards are in effect guides to users to help users make informed decisions in business. Having both historical and fair value must strike the balance of getting to the extreme of having one and disregarding the other.In other words, one needs to know what is historical for comparison to what is fair value or market value to make an informed judgment. Accounting standards must then work for the attainment for the creation of balance between the devil values. As to whether the accounting standards can allow for both historical and fair value and still produce meaningful information for decision making, is answered again in the affirmative. This can be tackled crack by breaking the given statement into two propositions first and then accede them latter.The first proposition would be state settled in the fact the accounting standards can allow both historical and fair value together. The second proposition is that the use of both will still produce meaningful information. This first proposition is accomplished since the practice have been do for a long time already since in the case of valuing of inventories, accounting standards allow the valuing them of lower of cost or market under the IAS 2. (Deloitte Touche Tohmatsu, 2008).The fact that inventories can be valued at cost sum the historical cost is maintained but requirement of presenting the fair value of stock-take if it has gone down in the market is also a part of the standard which in effect allows the working of fair value concept. There are other IAS concepts which allowed fair value accounting and historical value accounting. Thus this section is not much of a problem. The second proposition appears to also to have been fulfilled by the use of IAS as illustrated.More meaningful information is in fact reflected by allowing a combination of fair value and historical cost in the military rank of assets and liabilities of companies. By combining the validation through with(p) is confirming the application of two proposition, it could be sufficient to strongly answer the question in the affirmative. 5. Relevancy and Reliability Is one more important than the other, depending upon the financial user? Both relevancy and reliability are requirements for qualitative characteristic s of accounting information.Forcing one to be is more important than the other would be asking the wrong question if the objective is only to determine whether preparing financial information using their fair values is fair. In fact to say that an information must be relevant carries the presupposition that the information must also be reliable. This is on effrontery that reliability connotes objectiveness of information which is very much akin to being honor or fair. Information is relevant or has is relevancy character if it influences ones decision about a particular issue. On the other mitt, reliability deals with the objectivity or accuracy of the information.How could a decision maker consider information as relevant when there is no reliability of the information? On the other hand having reliable information would be of no value if the same is not requisite in the decision to be made. The two characteristics must therefore go together. 3. cultivation The issue of wheth er fair value accounting or the use of fair in accounting for company assets and liabilities is fair must be answered in the affirmative. What is fair is not what has caused much damaged to a person or entity if such damage was a result of reverse to follow the rudimentary rules of making investment.The effect of fair value should not be used to allow one to just justify cupidity while disregarding the rights of others. A loser under a fair value accounting is comparable to a person who is taking too much risk thus the return could also be high but could be low because of the working of the market. As long as buyers and sellers are not being compelled to consummate their transaction, fair value is still fair. Fair value accounting will widen to the truth but its value will also depend on the users of information after they have done their roles in the market.The user will still need to make a comparison with what is historical and what is the current fair value as caused by eco nomic conditions. Present accounting standards have caused the reporting of both gentle of information but users must also be intelligent in doing their part. Fair value as a concept in accounting standard was just made to correct the apparent failure of purely historical cost accounting. If fair value accounting is fair, it does not imply that the standard must go back to historical accounting but historical information must still be reported and allow the user to make a difference in how to process the information.Since fair value and historical cost could co-exist together, the same must be the damp option as it will submit a balance between historical and fair value accounting. References Brigham and Houston, Introduction to monetary Management, Thomson-South Western, USA, 2002 Chasan, Emily (2008), Is fair value accounting rattling fair? www document uniform resource locator, http//www. reuters. com/ term/reutersEdge/idUSN1546484120080226, Accessed October 20, 2008 Deloit te Touche Tohmatsu (2008), Summary of IFRS for IAS 2, www document uniform resource locator http//www. iasplus. com/standard/ias02. htm , Accessed October 21, 2008.Droms (1990) Finance and Accounting for Non pecuniary Managers, Addison-Wesley Publishing Company, England Helfert, Erich (1994), Techniques for Financial Analysis, IRWIN, Sydney, Australia Meigs and Meigs, 1995, Financial Accounting, McGraw-Hill, Inc, London, UK Rees-Mogg (2007), why FAS 157 strikes dread into bankers, www document URL http//www. timesonline. co. uk/tol/comment/columnists/william_rees_mogg/article2852547. ece, Accessed October 21, 2008. Sortur (2007) Fair Value Measurement, The leased Accountant www document URL, http//icai. org/resource_file/96471564-1574. pdf, Accessed October 21, 2008.