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Pros And Cons Of Fair Value Accounting

735 Words3 Pages

Fair value accounting is appropriate accounting standard for securities brokers. Respectively the business involve are in term of securities view and banking view. Fair value defines as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
In this term paper, we attempt to make sense of the current fair-value and discuss about the pros and cons that are available in fair value accounting. From the research, there are many controversy regarding fair-value accounting results from confusion what is new and different about fair-value accounting as well as different views about the purpose of fair-value accounting.

Question 1 …show more content…

Supporters said that, fair value are usually claim for the facts of the market price or estimate price on current situation and sometimes they have admit there will be no active market or no market at all, thus no real price. Moreover, fair value accounting also means as which lowers its value in the market and at the same time it decline the quality of a company’s own debt. Fair value accounting is an additional momentum to a destructive downside overshoot. From the FASB framework concludes that, “Fair value reflects losses that have been incurred, it does not cause losses.” In a downward cycle, this appears untrue. I believed that there are many solutions or approach that we have beside fair value accounting that can be used to solve the problem arise in the financial accounting such as based on historical cost, current cost, realisable value and present value. So everyone in the business line is able to decide which one approach is more suitable for them to carry …show more content…

It require the management to make a judgment to verify it. It was very straightforward to produce and only record the gains that are realized at the time and of course it still available to use in most accounting system although there are so many against toward historical cost approach. This approach is suitable for the situation where prices are stable or might change slowly. For example some of business that consist investment property are used to adopt historical cost and German GAAP only allowed the country to use historical cost basis only. Furthermore historical cost is more relevant for investor to make a wise decision because they are relying on the factor of “how much has already been earned rather than how much they can earn”. Mostly some of people like to use this approach because it helps to minimize the risk of manipulation of figures by the managers. However there are some disadvantage from applying historical cost approach which is we are unable to guarantee the quality of the information

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