Essay: Fair Value Accounting

Sample Essay

Introduction

It has been a common practice for accountants to record assets at their original or historical cost but in the wake of the economic crisis fair value accounting was implemented to give the investors and users of financial statements a more clear and transparent value of assets and liabilities. Fair value accounting also known as market to market accounting requires companies to record the value of assets and liabilities in accordance with the corresponding market prices.

Sometimes it is difficult to ascertain the market value of some assets and fair value is calculated on a profit and loss basis or the value is considered to be the estimated amount at which both parties agree to buy and sell the assets. Fair Value Accounting is applied in the valuation of financial instruments and assets especially after the subprime economic crisis. FVA is discussed here with reference to the Australian regulatory environment and Australian Accounting Standards Board – AASB. The AASB issued IAS -139 for the recording and measurement of financial instruments. The FVA practice has been welcomed and criticized on several matters, the advocates of FVA explain the benefits for investors in transparent values of financial instruments whereas criticism of FVA entails volatility of the market, difficulty in estimating fair values and huge write down in values. The concept of FVA is discussed with reference to arguments for and against FVA.

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