Fair Value

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Explanation of Fair Value accounting. Definition, relevance and measurement.

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What is Fair Value? Definition

Fair Value is an accounting expression, originally defined by the SEC. It should be regarded as a basis of accounting. The major alternative accounting basis being historical cost.

 

Under GAAP, the Fair Value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a liquidation. On the other side of the balance sheet, the Fair Value of a liability is the amount at which that liability could be incurred or settled in a current transaction between willing parties, other than in a liquidation.


If available, a quoted market price in an active market is the best evidence of Fair Value and should be used as the basis for the measurement. If a quoted market price is not available, preparers should make an estimate of Fair Value using the best information available in the circumstances. In many circumstances, quoted market prices are unavailable. As a result, making estimates of Fair Value is often difficult.
 

Why Fair Value accounting? Relevance.

The basis of accounting - whether FV or historical cost - affects the choices investors take, and the decisions managers make. Today's markets are dynamic and volatile. Whether it is for buying or selling, what people want to know is what an asset is worth today.

Accounting Research is supporting that assertion. The FASB, after extensive discussions, has concluded that Fair Value is the most relevant measure for financial instruments. In its deliberations of Statement 133, the FASB revisited that issue and again renewed its commitment to eventually measuring all financial instruments at Fair Value.

Fair Value accounting provides more transparency than historical cost based measurements. Maybe, if companies in the United States and Asia had measured all financial instruments at Fair Value, regulators, depositors, and investors could have achieved greater regulatory and market discipline and avoided some of the losses that investors and taxpayers have had to pay during previous downturns in the economy.


Fair Value Forum
  Fair Value Equation
Hi, I'm looking for a Fair Value governing equation.
Is thee any general differential or partial differential equation which can be used for representing or governing Fair Value as a function of (say x, y, t and any other parameters)?...
     
 

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Best Practices - Fair Value Premium

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Disadvantages of Fair Value Approach

In addition to below mentioned advantages of fair value accounting, it also has to be noted that the fair value approach might lead to following pr...
Usage (application): Fair Value Accounting
 
 
 

Advantages of Fair Value Approach

In a policy paper titled "Fair Value" by the Association of Chartered Certified Accountants (ACCA), it is argued that a fair value approach has fol...
Usage (application): Fair Value Accounting
 
 
 

SFAS 157 - Key Attributes

Issued in September 2006, the Statement of Financial Accounting Standards No. 157 defines the intent of fair value measurements for financial r...
Usage (application): Fair Value Measurements
 
 
 

Key Challenges for Auditors

The key challenge of the fair value approach for accountants and auditors is based on the fact that the valuation relies on assumptions, modeli...
Usage (application): Fair Value Accounting
 
 

Resources - Fair Value Premium

IFRS Pros and Cons

There is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of uniform accounting rules within a co...
Usage (application): Accounting, Investing
 

Quality of Fair Value

Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper by Don Herrmann, Shahrokh M. Saudagaran and Wayne B. Thomas argues for fa...
Usage (application): Property, Plant, and Equipment
 

USGAAP versus IFRS on Intangibles Accounting

This presentation compares USGAAP and IFRS, and includes the following sections:
1. Presentation Overview
2. Executive Summary
3. Progr...
Usage (application): Intangible Assets, Accounting, USGAAP, IFRS
 

Full Fair Value

The paper by GŁnther Gebhardt, Rolf Reichardt and Carsten Wittenbrink analyses the effects of three sets of accounting rules for financial instruments...
Usage (application): Banking Industry
 

Accounting for Derivatives

In this paper, Ronnie Barnes discusses the issue of how non-financial corporations should report the results of their use of derivative financial inst...
Usage (application): Risk Policies
 
 

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Compare with: Economic Value Added  |  EBITDA  |  Earnings per Share  |  Economic Margin


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