Fair Value Accounting

In: Business and Management

Submitted By roversfan
Words 3059
Pages 13
The concept of Fair Value
Fair value is defined as “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction”.
Prior to the introduction of Fair Value Accounting (FVA), accounting was carried out on a historical cost basis. However there were many limitations of Historical Cost accounting (HCA). HCA assumes money holds a constant purchasing power. It ignores specific price-level change, general price-level change and fluctuations in exchange rates. During inflationary periods, HCA can become irrelevant and can lead to an erosion of operating capacity.
IASB framework states “the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. It also states “financial statements also show the results of stewardship of management, or accountability of management for the resources entrusted to it”. FVA is superior to historical cost accounting for these purposes. FVA is dominant in numerous IFRS’s and IAS’s.
The IASB have yet to finalise an IFRS on fair value measurement, but it is expected it will have been completed by early 2011. Furthermore, the IASB is developing extra educational material to accompany the publication of the IFRS on fair value measurement. This material will give a description on the thought process for the measurement of assets, liabilities and equity instruments at fair value. The fair value measurement framework will be based upon the core principles that define fair value as an exit price “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”. Another aim of this project is to improve disclosures about fair value…...

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