Fair Value Accounting - Term Paper.
Fair value accounting is the process of periodically adjusting an item’s value in accounting books. Assets and investments are the most common items that apply under this accounting principle. This principle changes the traditional accounting reporting method, which used historical costs to value items on a company’s books.
On the contrary, fair value accounting on the other hand measures and records current values of assets and liabilities in the balance sheet therefore making the book value to be approximately equal to the market value. The fair value approach therefore increases the value relevance of the balance sheet.
Fair-value accounting, he argues, goes against the fundamental purpose of accounting. It would actually inject more uncertainty into financial reporting and make life harder for shareholders. It might even create new opportunities for companies to cook their books.
Does Fair Value Accounting for Non-Financial Assets Pass the Market Test? Hans B. Christensen and Valeri V. Nikolaev The University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 Abstract: The choice between fair value and historical cost accounting is the subject of longstanding controversy among accounting academics and regulators.
Using fair value accounting, when values of assets decrease, the company’s calculated net income decreases. When the company’s value of liabilities increase, the company’s calculated net income also decreases. Net income is the bottom line of a company’s Income Statement. This amount reflects the amount the company pays taxes on.
The role of fair value accounting in the global financial crisis will be evaluated and recent developments on fair value accounting by the IASB will be highlighted. Core sources of information for this evaluation will be publications for standard setters (IASB and FASB), professional accounting bodies (ACCA, ICAEW, CIPFA and ICAS), opinions of business leaders and empirical research.
The fair value accounting or fair value accounting is a way of measuring the assets of an entity, mainly used in the valuation of financial assets and liabilities, and is still very controversial in recent decades. This controversy occurs practically since the 80s, a decade that.