Pros And Cons Of Fair Value Accounting In Global Accounting Essay.

1. Identify the underlying social and corporate imperatives that underlie the accounting conceptual framework.
2. Identify the key players in Australian financial reporting regulation and articulate the relationship between International Financial Reporting Standards (IFRSs) and Australian Accounting Standards (AASs).
3. Explain the relationship between accounting theory, the accounting conceptual framework and accounting standards.
4. Work individually and in groups to identify and apply appropriate accounting standards to a range of authentic accounting scenarios

Fair Value Accounting: Advantages and Disadvantages

The underlying essay is undertaken for presenting a critical review of the article is written by Antonia Marra and published in the year 2016. This article provides the information on fair value of accounting and how it helps in valuing the elements of financial statements. It also discusses the pro and cons of fair value measurement in the global accounting. The critical review is undertaken by explaining the advantages and disadvantages of fair value accounting (FV) accounting.  This is followed by explaining the three-tier process in detail that is discussed within the article. In addition to this, the qualitative characteristics of financial information to be considered using FV method in financial reporting are also discussed within the report.

The concept of FV measurement has been introduced by the IASB and it is used while preparing the financial reports for the company. It helps in improving the reliability of the financial information disclosed to the end-users. The application of FV enables the companies to identify and measure estimated values of assets and liabilities on the balance sheet date so that their fair market price can be reflected. It helps to provide the true and fair picture of financial statement. However, the concept is associated with larger debate since its origin due to the significant benefits and drawbacks that are associated with its use. The major benefit derived by the companies with the use of fair value accounting approach is that it provides most relevant information as per the current market conditions.  It helps in providing realistic information to the end-users as also stated in the given article. The fair value measures the value of an asset or liability as per the market conditions and this makes the information disclosed to be verifiable from the available market information. Thus, the financial experts have stated that this accounting approach helps in improving the transparency within the financial reporting and facilitates the investors for making accurate decisions.

However, the occurrence of the global financial crisis in the year 2008 have highlighted various criticism associated with this concept.  It has been pointed out by various accounting experts that the use of this approach enabled the business managers for manipulating the financial results (Marra, 2016). For example, the accounting scandal of Enron has revealed that business executives have adopted the use of fair values for overstating revenue within the company. In addition to this, the unavailability of the market price for a given asset can have an impact on the reliability of the financial information obtained with the use of this concept. Also, sometimes the observed amount of assets within the market does not provide required fundamental value of such assets as per IFRS. The inefficiency present within the market can lead to uncertainty within the fair value and thus resulting in providing misleading information within the financial statements (Sundgren, 2013).

Three-tier Process in Fair Value Measurement

Fair value accounting is typically based on market based measures and it is regarded as its governing principle to measure the value of elements of financial statements.

The assumption that is taken to value the fair value elements is that date for market prices are being taken from various market participants that are active. In this way it is easy to estimate the fair value of different elements of financial statement and it is more reliable than the internal estimates. So, it can be said that market price provides the best estimate of fair value if the market prices of such elements are effectively available and it is easy to calculate. This is the reason why the fair value hierarchy has been divided into three levels of three tiers. Among these levels the fair value hierarchy prioritizes the inputs used to calculate the fair value of different elements (PWC, 2008). For example, in level 1 or tier 1, quoted prices available in active market is taken and in level 3 or tier 3 the unobservable inputs is taken. Fair value hierarchy can be understood in detail from the below table:

 (Source: https://www.pwc.com/bm/en/publication/assets/usgaap_08_04.pdf )

The qualitative characteristics of financial reporting that need to be considered during the use of the concept of fair value are reliability and relevancy. The financial information presented through the use of fair value is regarded to be highly reliable as it can be easily verified. The fair value is inferred on the basis of market price of an asset and thus it can be easily verified from the information available in the market about its current and past market prices. It is also need to be considered by the use of fair value accounting approach that the information presented need to be highly reliable and does not mislead the investors in any way. The financial information disclosed through the use of fair value accounting also need to be relevant that is capable of facilitating the decision-making process of end users. The use of fair value helps in providing an unbiased perception of an entity’s assets and liabilities and as such provides realistic information to the end-users that is relevant for decision-making process of investors (Bilka, 2012).

Fair value measurement is mainly used to estimate the assets and liabilities as values of other elements of financial statement is either transacted value or values which is directly assessable. Fair value of assets and liabilities is needed to assess at many points while preparing the balance sheet or when such assets and liabilities are need to be transacted (KPMG, 2017).

Conclusion

It can be stated on the basis of overall analysis of the article that fair value accounting use in the financial reporting process is still a topic of debate. There are both benefits and limitations associated with its use as discussed above. Also, the implementation of the concept adopts the use of a three-tier hierarchy on the basis of market-based measures. The use of fair value considers the reliability and relevancy of the financial information and is primarily used in measuring the value of financial items of assets and liabilities as discussed in the essay. 

References

ACCA. 2011. How to measure fair value. Retrieved on November 16, 2018, from https://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/measure-value.html 

Bilka, P. (2012). Fair Value in Financial Statements – Advantages and Disadvantages. Economics Series 22(2), 1-8.

KPMG. 2017. Statement of Financial Accounting Standards No. 157 – Fair Value Measurements. Retrieved on November 16, 2018, from https://home.kpmg.com/content/dam/kpmg/xx/pdf/2017/12/fair-value-qa-2017.pdf 

Marra, A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized Economy: A Never Ending Debate. Journal of Accounting, Auditing & Finance 31(4), 582–591.

PWC. 2008. Statement of Financial Accounting Standards No. 157 – Fair Value Measurements. Retrieved on November 16, 2018, from https://www.pwc.com/bm/en/publication/assets/usgaap_08_04.pdf 

Sundgren, S. 2013. Is fair value accounting really fair? A discussion of pros and cons with fair value measurement. Retrieved 16 November, 2018, from https://lta.lib.aalto.fi/2013/3-4/lta_2013_03-4_d5.pdf