Fair Value

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Summary

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.


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🔥 NEW 3 Levels of Fair Value Accounting in US GAAP
Under US GAAP, there are 3 levels applicable to this given standard FAS 157:
- Only level 1 can be determined direc (...)
2
 
Fair Value Equation
Hi, I'm looking for a Fair Value governing equation.
Is thee any general differential or partial differential equat (...)
1
 
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Disadvantages of Fair Value Approach

Fair Value Accounting
In addition to below mentioned advantages of fair value accounting, it also has to be noted that the fair value approach (...)

Advantages of Fair Value Approach

Fair Value Accounting
In a policy paper titled "Fair Value" by the Association of Chartered Certified Accountants (ACCA), it is argued that a (...)

SFAS 157 - Key Attributes

Fair Value Measurements
Issued in September 2006, the Statement of Financial Accounting Standards No. 157 defines the intent of fair value measu (...)

Key Challenges for Auditors

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The key challenge of the fair value approach for accountants and auditors is based on the fact that the valuation relies (...)

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Various sources of information regarding Fair Value Accounting. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.


IFRS Pros and Cons

Accounting, Investing
There is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of unifor (...)

Quality of Fair Value

Property, Plant, and Equipment
Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper by Don Herrmann, Shahrokh M. Saudagaran and (...)

USGAAP versus IFRS on Intangibles Accounting

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

Full Fair Value

Banking Industry
The paper by Günther Gebhardt, Rolf Reichardt and Carsten Wittenbrink analyses the effects of three sets of accounting r (...)

Accounting for Derivatives

Risk Policies
In this paper, Ronnie Barnes discusses the issue of how non-financial corporations should report the results of their us (...)

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


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