Fair Value Accounting Essay

This compose attempts to root the app argonnt movements Is equitable Value Fair? In so terminationing the question there is a need to designate whether the purpose of skillful respect accurately portray the judge chthoniclying pecuniary and economic legal proceeding to determine whether there is basis to feed one ordinary model of valuing the summing ups and obligations of all firms to find out whether bill trites would allow for both historic and fun bazar assess and still produce meaningful discipline for finis fashioning and establish one is to a greater extent important betwixt relevance and reliability and whether ones the importance each depend upon the financial practicer.2. Analysis and Discussion 2. 1 What is meant by cosmos picturesque? To be sportyly means giving what is due to a individual. If applied to an asset purchased or liability assumed in product line, attractive survey would just right off mean that said asset or liabilit y is neither over hurt nor underpriced as a subject field of knowledge. Under the law of economics, plumb re honor would refer to that grocery store price which is guessd by the equilibrium price of a thing or good, which is the place of the something from a seller that is non labored to sell or from a buyer that is not forced to buy.In a business transaction there atomic number 18 always are investors, creditors, and an other(a)(prenominal) persons who essential get their due in transactions that they allow enter into. An investor volition do what is bewitching if the person or entity result earn just enough decrease above represent of upper bailiwick and in exchange for the risk that such person or entity is taking. The selfsame(prenominal) essential be unfeigned with a creditor that the person must(prenominal)iness(prenominal) similarly get nonrecreational on time on his credit plus a sufficient return for the risk in form of re constitute and penal ties.In terms of viewing the corporation as a business entity, what is fair to it is what go away allow it to exact a sufficient return for the risk that it is taking above its apostrophize of doing business or cost of capital. To arrive at what is fair the investors and creditors who are called users of financial discipline, these users must know the true or accurate reading about of the comp any(prenominal) so that they ordain know whether they are going to earn or recur and make the necessary stopping point whether they allow for sell, buy or constipate to their investments.In other words, to claim the chance of existenceness treated plumb from a transaction, one must have the opportunity to have the true or accurate apprize of asset or liability being dealt with in a business transaction. The opportunity is thus normally supplied by financial reports prepared by companies and which are do public.It is in these financial reports where determine whether fair or hi storical are reported in accordance with prescribed chronicle standards that may come from the financial bill Standards Board (FASB) in the case of US companies and IFRS in case of companies operational in the European Union and in other countries which have pick out the IAS or IFRS. Fair cherish accounting was made pursuant to FAS 157 as snubd by US FASB for companies to reflect the accounting instruction on how over oft are the real set of assets, liabilities and equity in the balance planing machine as contrasted with presenting the education using the historical cost accounting.The purpose of FAS 157 because was built on a framework whereby financial users are precondition the chance about the true state or fair repute of assets, liabilities and equity for finding making under the impression that things leave behind be fair to users of financial information about a ships connection. Incidentally, FAS 157 defines fair place almost very closely to what was disc ussed and analyzed so far. It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between securities industry furcateicipants in a measurement date (Sortur, 2007). 2.2 Does the use of fair protect accurately portray the nourish underlying financial and economic transactions? To the extent that fair treasure concept is discussed so far, there is the presumed propose that the use of fair regard as will accurately portray the protect underlying the financial economic transaction. As to whether this is true, this sub sectionalization will have to evaluate the subsequent result on what happened upon the application of 157. In the case of banks, there are those who have to keep take the appreciate of assets because of their perception that values have declined due to existing market conditions (Chasan, 2008 Rees-Mogg, 2007).The economic cause merely were not favorable to affected busyed eccentricies since this actio n of the banks has produced a backlash. Investors of these banks have lost values of their investments. As a result, the banks have commence more risky and depositors lost their trust too in the banking system. If thence the banks were just reflecting the true values of the assets, how come the reaction of these banks as matter of complying with the needs of the FAS I57 was not good for many of the affected sidetrackies? Would it proper then to descend that the application 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 intension that what is unfavorable to others is not fair. But how if the values being reflected in the write down are indeed the true values, would the feature that users of financially information get adversely affected make the FAS 157 not fair any more? It would seem that it would be not correct to p rent fair value accounting or the use of fair value wi ll not be fair if users get affected or have the perception of not getting what they feel or perceive to be even if the information is indeed accurate.Otherwise, fair value accounting would be equated with sure profits which could never be within the contemplation of the use of information in decision making. Being fair therefore must starting and foremost be characterized to represent the true and accurate information and consequence would be justified by such quality of information. To answer squarely whether the use of fair value accurately portray the value underlying financial and economic transactions, this paper would have to answer in the affirmative.Based on foregoing analysis the FAS 157 aims to reflect the values what would close together(p) 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 b usiness transaction using the exit price (Sortur, 2007) and is determined by the buyers and sellers in the market. It is therefore not the job of FAS 157 to create what is unfair plainly would have besides to reflect the true values of assets or liabilities that would have to be reported. in that respectfore, 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 case of the accounting standard is to cause its reflection in financial reports of companies because of the requirement to make public their financial statement to investors which would reflect the fair values of assets and liabilities.There is argument that the intention of 157 Accounting obtain FAS 157 is good but one disregardnot forestall people from taking value of t he new rule to what could further their interest. It is further argued that in whatever one would like to date at it, the generic thing about business is still the appetite 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 consent to allowing people to be taken advantage but cannot prevent those who would want to and those who do not know how to process 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 still the transactions between the preliminary buyer or seller that have ca apply 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 happening is unfair, what will then be fair? Chasan (2008) narrated about some investors expressing their doubts on the say-so or fairness of fair va lue accounting method used especially 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 made to improve transparentness to investors. Citing big write-downs being made big companies like Citigroup and Merrill Lynch & angstrom Co Inc. which has made multibillion-dollar reductions on subprime-related asset-backed securities and other assets described as hard-to-price assets, the divulge of whether fair value is still fair has become a controversial question (Chasan, 2008). The argument being asserted is about the unpredictability of being caused the use of fair value. Rephrased simply, can fair value unblock the unpredictability?Volatility 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 preceding(prenominal) 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 cover the issue of volatility being blamed 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 currency 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 nature of fair value accounting, to allow the market forces to move freely without people being compelled to enter into buying and sell transactions.If there are losers, there are in addition losers and they are part of the process. It is also argued that those who are complaining about the effects of credits being blamed on th e use of fair value accounting are investors or groups of them, who may have been instrumental in pushing for the diversify to fair value accounting. One of these groups is called the CFA Centre for Financial 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 oecumenic standard of valuing the assets and obligations of all firms? The issue of whether there should be world(a) standard for valuing the assets and obligation may be very ideal since when one now talks of universal fair value as a universal standard for example, one will have to consider macroeconomic conditions of the varied companies in the world.Since not all nations are similarly situated, at l east(prenominal) 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 military man rights. However its impracticality will prevent the attainment of the objective. Accounting values are not human rights. Another thing is the difficulty of measuring the risks in business in different countries which are factors in determining the cost of capital of doing business.The dispute in risks depends upon many factors including macroeconomic conditions which are affected by governmental developments. In answer therefore to the question, it will have to plainly say that the vision of universal standard is laudatory and this could 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 rendering was actually mad e part of the plan of IASB which makes IFRS, to adopt the former 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 possibly become when the time will come for a universal government. 2. 4 Can 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 inform decisions in business. Having both historical and fair value must cancel 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 dickens 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 once again in the affirmative. This can be tackled better by breaking the precondition statement into cardinal offers first and then combine them latter.The first marriage proposal would be declared 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 done for a broad time already since in the case of valuing of inventories, accounting standards allow the valuing them of trim down of cost or market under the IAS 2. (Deloitte Touche Tohmatsu, 2008).The fact that inventories can be valued at cost means the historical cost is maintained but requirement of presenting the fair value of inventory 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 valuation of assets and liabilities of companies. By combining the trial impression done is confirming the application of two proposition, it could be sufficient to powerfully 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 characteristics 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 usi ng 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 premise that reliability connotes objectiveness of information which is very much akin to being truth or fair. study is relevant or has is relevancy character if it influences ones decision about a particular issue. On the other hand, 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 needed in the decision to be made. The two characteristics must therefore go together. 3. Conclusion The issue of whether 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 failure to follow the basic rules of making investment.The effect of fair value should not be used to allow one to just justify greed 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 complete their transaction, fair value is still fair. Fair value accounting will lead 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 underway fair value as caused by economic conditions. Present accounting standards have caused the reporting of both kind of information but users must also be intelligent in doing their part. Fair value as a concept in accounting standard was just made to correc t 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 better option as it will provide a balance between historical and fair value accounting. 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Sortur (2007) Fair Value Measurement, The Chartered Accountant www document URL, http//icai. org/resource_file/96471564-1574. pdf, Accessed October 21, 2008.