Fair value has been frequently employed in FASB an IASB accounting standards raising different suggestions towards its reliability and relevance as a measurement basis (Barth et. al, 2008). IASB and FASB are common boards that manage numerous accounting practices. Consequently, fair value measurement has numerous impacts on accounting practices including presenting relevant information for investors. The main objective behind fair value measurement usually involves determining the price that is receivable for a sale of an asset or the price that would be paid to transfer a liability at the capacity date.
Fair value measurement entails evaluation of different asset-related aspects necessary for its valuation. In order to have an effective fair value accounting, there are numerous rules and guidelines that surround fair value measurements (Ronen, 2008). There are several aspects that need to be considered for effective fair value measurement. For instance, an industry should determine the asset or liability subject for the measurement. In addition, the industry needs to determine the valuation premise appropriate for the measurement and the most substantial market for the liability or the asset (Barth et. al, 2008).
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Fair value measurement has numerous advantages, especially on accounting practices. First, it is necessary for accurate valuation (Barth et. al, 2008). It provides accurate liability and asset valuation on an ongoing accounting practice including preparation of financial information. Moreover, it updates the firm on the dynamics of the market. For instance, when the price of an asset or liability increases, the firm marks up the value of the asset or the liability to the current market price. This helps the firm determine the value of the available assets and the prices they would match with if they were to be sold at the current market price.
Fair value measurement is necessary for the evaluation of true income. The information obtained through this aid the firm in understanding the balance between the net sales and the net income. For instance, there exist different instances where the firm might require the recording of gains and losses incurred in its operations. In consideration of true income, a decrease in asset value decreases net income. Similarly, an increase in liability value decreases net income (Ronen, 2008).
Development of fair value accounting rules and guidelines usually considers the following aspects. First, consideration of the asset and liability available for measurement. The second step involves the valuation of the premise (asset) that is subject to measurement and the most appropriate market for the chosen asset and liability as well. The valuation techniques should be considered for fair value measurement. This puts into consideration the available data for developing the necessary inputs (Barth et. al, 2008).
The information presented through fair value measurement is significant for different business stakeholders including the investors. Fair value accounting rules requires all financial assets and liabilities to be measured at their fair value (Ronen, 2008). Development of fair value accounting rules and guidelines matches with the basic accounting regulations. The economic entity assumption is among the regulations that require that accountants separate all the business transactions of a firm from the owner’s personal transactions. Therefore, the development of the relevant regulations considers that basic rules applied in accounting.
Since fair value accounting entails a frequent adjustment of an item’s value in the firm’s accounting books, it has the following issues (Barth et. al, 2008). To begin with, the frequent changes attract imbalances in a firm’s value and earnings. This makes it hard for investors who depend on such information to evaluate the value of the company. Accountants, on the other hand, do not rely on this approach in accounting since it attracts different processes including valuing the items to determine the actual value. Moreover, fair value accounting has issues related to the inability to value assets. This issue mainly affects values related to firms with specialized assets.
Rules and regulations surrounding fair value measurements have several impacts on different firms. They are necessary for the determination of true income that determines the company’s ability to manipulate its net income (Barley & Haddad, 2013). In addition, the rules are necessary for an effective determination of total gains and losses. The rules regulate the period in which the report is to be disbursed relating to the liabilities and assets in the firm. However, the rules and regulations influence how a firm manages its assets. Through the determination of net losses and gains, the fair value accounting rules determine the market regulation and the price to be marked for every asset in the firm. In addition, the rules might attract value reversal that influences a firm’s financial information. According to Barley & Haddad, (2013), the rules defined may not favor a firm when the markets conditions fluctuate in terms of the given liabilities and assets. In return, financial information reporting might be inaccurate following the instabilities in the market.
Mostly, managers and auditors are involved in asset valuation in a firm. In consideration of the fair value measurement, the information obtained may attract varying conclusions from the involved parties. In most cases, this might be based on the comparability of different seasons in the market (Barth et. al, 2008). In addition, there might be inactive markets that may prove to be unreliable hence pressuring the parties involved. Investors and creditors mainly rely on financial information resented through fail value accounting. As a result, cases of value reversal and different market effects might not present effective information. Fair value measurement mostly involves income statements, which cannot be used to convey financial information (Barth et. al, 2008). Unlike a balance sheet that is necessary for conveying the required information. In conclusion, fair value measurements determine the value of assets and liabilities subject to periodic changes thus they are necessary for informing about the risk in the marketing of the respective assets and liabilities as well (Ronen, 2008).
References
Barlev, B., & Haddad, J. R. (2013). Fair value accounting and the management of the firm. Critical perspectives on accounting , 14 (4), 383-415.’
Barth, M. E., Hodder, L. D., & Stubben, S. R. (2008). Fair value accounting for liabilities and own credit risk. The accounting review , 83 (3), 629-664.
Ronen, J. (2008). To fair value or not to fair value: a broader perspective. Abacus , 44 (2), 181-208.
