The Advantages And Disadvantages Of Fair Value Accounting

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Fair Value Accounting Fair value accounting is the acceptable amount relating to a particular asset that is equitable and unbiased (Drury & Colin, 124). Under fair value measurements, it is necessary to keep measuring the assets often so as to reflect the fluctuations happening in the market, explaining its volatile nature in a given financial period. Various factors should be considered when determining the fair value, and they include the production costs, distribution costs, the risk characteristics and the cost of related products in the market (Drury & Colin, 126). There are various valuation techniques used in fair value measurements; therefore, it is the responsibility of the organization to come up with the best approach based on the current situation of their assets or liabilities. One of the most applied techniques focuses on the price of other similar assets in the market, and it is known as the market approach. The other method is concerned with what cost would be used to replace the asset, called the cost approach (IFRS 13).
If they applied the historical cost convention, this provision would not be available, leading to difficulties in such a period. Disadvantages of Fair Value Accounting? Changes in the value of assets may not provide accurate results of income. For example, there are companies that have volatile assets whose prices will keep changing. Volatility will result in a series of gains and losses which may not depict the real picture of gains and losses of the organization over time (Drury & Colin 137). Secondly, using this accounting approach greatly discourages investors in the sense that fluctuations in the net income are frequent. Investors may get discouraged where losses often occur and opt to withdraw their investment. If the historical approach were in place, the volatility would be minimal, and it would not affect the investors that much. Finally, this principle is less reliable in cases where different firms with similar assets value them differently.

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