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Essay On Fair Value Accounting

899 Words4 Pages

Fair value accounting (FVA) has pros and cons itself. It depends on how the fair value applied by the companies. Supporters of FVA argue that FVA can increase transparency for presenting financial statement to the third parties (Ian E. Scott, 2010). Increased transparency allows users to better understand financial performance and true picture of the company and gain additional insights in making decisions. According Zijl and Whittington (2006), fair values are useful for investors and increase transparency. Thus, FV gives belief and will be free from subjective intentions of the current owner of asset, estimation of fair value by a market price obtained from the active market, well informed and competitive market. According to Betakova, J;Hrazdilova Bockova, K.& Skoda,M., they also agree that FVA can increase transparency of a firm and fair value information is useful for investors in making decisions, for contractor and lenders to have better …show more content…

Measurement of the fair value of asset and liability only can refer to the active market. When the market is illiquid, the assets will be recognized at the forced sale values instead of their true values. So, the estimation introduced by the fair value valuation models, and lack of definite measurement indicator causes concerns about the reliability of the fair value measurements has been raised. According to Stephen G. Ryan (2008), when level-2 inputs are driven by forced sales in illiquid markets, the company is allowed to use level-3 model based fair values. However, the use of level-3 model might be difficult to be used by the company because it requires the company to provide to evidence to prove that the market prices are driven by the illiquid markets fire sales. If the company cannot to do so, the company is expected to use level-2 model which will yield larger amount or unrealized losses to

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