Accounting Theory 4
Fair value or false accounting
1. How are assets and liabilities measured under IAS 39?
Answer:
According to IAS 39, Financial Instruments: Recognition and Measurement, financial instrument are to be stated at their ‘fair value’- defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’.
‘If the market for a financial instrument is not active, an entity establishes a fair value by using valuation technique….(including) discounted cashflow analysis and option pricing models,’ says IAS 39.
‘A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be recognized in profit or loss.’
2. What impact according to the author, will fair value accounting have on the balance sheet and income statement?
Answer:
As far as financial instruments are concerned, fair value accounting is notable for its closeness to the long-cherished academic ideal of ‘income as present value growth’. The possible objection can there be to fair value accounting, IAS 39 looks like a passport to the promised land of ‘truth and Fairness of view’.
Using fair value accounting make reporting the financial statement in the real condition even it was had a great impact of the economic condition such as the financial position of a company who had the impact of national inflation. In accounting we still need to present all the financial position based on the economic reality so all the stakeholders as a user of the financial statement can knew exactly the real condition of a company.
So, accounting as current economic reality is balance sheet and income statement should be based on a valuation basis that is more reflective of economic reality rather than historical costs. Focus on current and future prices.
3. What measurement requirement of historical cost accounting is violated ?
Answer:
1. How are assets and liabilities measured under IAS 39?
Answer:
According to IAS 39, Financial Instruments: Recognition and Measurement, financial instrument are to be stated at their ‘fair value’- defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’.
‘If the market for a financial instrument is not active, an entity establishes a fair value by using valuation technique….(including) discounted cashflow analysis and option pricing models,’ says IAS 39.
‘A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be recognized in profit or loss.’
2. What impact according to the author, will fair value accounting have on the balance sheet and income statement?
Answer:
As far as financial instruments are concerned, fair value accounting is notable for its closeness to the long-cherished academic ideal of ‘income as present value growth’. The possible objection can there be to fair value accounting, IAS 39 looks like a passport to the promised land of ‘truth and Fairness of view’.
Using fair value accounting make reporting the financial statement in the real condition even it was had a great impact of the economic condition such as the financial position of a company who had the impact of national inflation. In accounting we still need to present all the financial position based on the economic reality so all the stakeholders as a user of the financial statement can knew exactly the real condition of a company.
So, accounting as current economic reality is balance sheet and income statement should be based on a valuation basis that is more reflective of economic reality rather than historical costs. Focus on current and future prices.
3. What measurement requirement of historical cost accounting is violated ?
Answer: