Historical Cost V Fair Value

Topics: Fair value, Financial markets, Bond Pages: 3 (1011 words) Published: September 14, 2009
Explanation and Benefits of Fair Value Accounting

Prepared by: The Bond Market Association International Swaps & Derivatives Association Securities Industry Association

March 26, 2002

Explanation and Benefits of Fair Value Accounting Key Points • • • • Many financial instruments are measured and reported at “fair value.” Financial firms use some form of modeling in estimating fair value for many instruments. Most firms have a robust internal control process for ensuring that the models used in these valuations are reasonable and reflect underlying market conditions. Information about how firms calculate fair value is fully disclosed in financial reports.

Definition Fair value is an estimate of the price an entity would realize if it were to sell an asset, or the price it would pay to relieve a liability. Many financial instruments – such as shares traded on an exchange, debt securities (U.S. Treasury bonds), and derivatives – are measured and reported at fair value. Use of Fair Value Fair value is a required measure for many financial instruments. Determining whether a financial instrument should be recorded at fair value in a company’s financial statements depends in part on what type of institution owns the instrument and the intended use of that instrument. For example, in the case of a broker-dealer, a high percentage of its assets typically are traded and must therefore be accounted for at fair value. Other institutions record financial instruments at fair value depending on what their intent is for holding the instrument or the nature of the business activity. If an institution decided to hold a U.S. Treasury bond to maturity, for example, the bond can be shown at its original cost. If the institution purchases another identical Treasury bond that it intends to sell in the near future, that bond would be accounted for at fair value. In addition to using fair value measures to comply with public reporting requirements, companies measure their...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay on Historical Cost and Fair Value
  • Essay on Fair Value vs. Historical Cost Accounting
  • Historical Cost Essay
  • Fair Value vs Historic Cost Essay
  • Hisorical Cost vs Fair Value Essay
  • fair value accounting Essay
  • Essay about Fair Value
  • Fair Value: Is It Fair Game for Critics? Essay

Become a StudyMode Member

Sign Up - It's Free