Type of accounting that companies measure & report certain assets and liabilities at prices the company would receive if they sold them and liabilities are reported at the value the company would receive if they were relieved of them. The purpose of this method is for creating realistic financial statements.
Advantages of Fair Value Accounting
Reduced Net Income
when values of assets decrease, the company's calculated net income decreases. lower net income results in lower taxes
results in less employee bonuses
Realistic Financial Statements
more accurate financial statements as assets & liabilities are reported for their actual value. companies need disclose information regarding changes made on their financial statements. Company able make wise choices regarding future business operations by analyse their financial statements with actual fair values. Investors Benefit
financial statements reflect the company's heath with actual value of assets and liabilities. allows investors to make wiser decisions regarding their investment
Disadvantages of Fair Value Accounting
item's value change frequently
Difficult for investors to value the company as major swings in a company's value and earnings. inaccurate valuations can lead to audit problems.
fair values can fluctuate significantly over a short time and thus produce major swings in reported results. Less Reliable
difficult to value items with different values in different regions. company with similar assets or investments values items differently than another, issues may arise due to accountant's valuation method as judgment call on valuing items on the books. Inability to Value Assets
difficult to value items on the open market when no market information is available.