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Fair Value Accounting

In: Business and Management

Submitted By harryzhangjw
Words 1011
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Questions for Fair value accounting case 1. What is fair value accounting, what are its advantages and disadvantages 2. How is it different from historical cost accounting 3. What are level 1, 2, 3 assets 4. Give a simple example of level 1, 2, 3 assets 5. Suggest 3 ways to improve reporting fair value assets.


Fair value accounting is method of accounting the value of assets, liabilities and shareholders’ equity in rational and unbiased manner by taking into consideration several objective and subjective factors. The objective factors include but are not limited to acquisition/ production/ distribution costs, replacement costs, or costs of close substitutes, actual utility at a given level of development of social productive capability supply versus demand. Certain subjective factors include risk characteristics, cost of and return on capital, perceived utility, etc.

Advantages of fair value accounting: 1. Timeliness: The valuation reflects the most up-to-date and market value as of reporting date. The impact of fair value measurements—whether positive or negative on a company—is the result of market forces. 2. Transparency: Investors benefit when companies disclose their views on the impact of market illiquidity in their financial reporting. Investors and other users have greater insight into management’s views as to ultimate settlement amounts. 3. Relevancy: the valuation is the most relevant at the date and time of reporting.

Caveats of fair value accounting: 1. Reliability in illiquid markets: for assets or liabilities which are illiquid, the lack of appropriate models to determine fair value may result in unnecessary arguments and economic costs. 2. Facilitating unnecessary euphoria, which may arguably contribute to the company/ asset’s...

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