What Are The Pros And Cons Of Fair Value Accounting

3.1. Pros of fair value accounting

 Timely information

Since fair value accounting utilizes information specific for the time and current market conditions, it attempts to provide the most relevant estimates possible. It has a great informative value for a firm itself and encourages prompt corrective actions.

 It provides an accurate valuation

This method of accounting helps to provide more accuracy when it comes to current valuations from assets and liabilities. If prices are expected to increase or decrease, then the valuation can do the same. If sales occur, then there aren’t discrepancies that must be charted if the valuation differ from the transaction. The current market prices allow individuals or businesses to know exactly where they

This way produced financial statements therefore increase transparency of a firm, which is particularly useful to potential investors, contractors and lenders, as they have a better perception of the stability of a given firm and insight into its.

 It provides a measurement of true income

There is less of an opportunity to manipulate accounting data using the fair value approach.

Instead of using the sale of assets to affect gains or losses, the price changes are simply tracked based on the actual or estimated value. The changes to income happen with the changes to the asset value, reflected in the final net income numbers.

 It is the most agreed upon standard of accounting

Instead of the historical cost value that isn’t always accurate after a long period of time, fair value accounting accurately tracks all types of assets, from equipment to buildings to even land.

This makes it the most agreed upon standard of accounting because set prices, even if still accurate in value, aren’t the same because of monetary inflation. $10 today is not worth

Fair value accounting allows for asset reductions within that market, so that a business can have a fighting chance.

3.2. The cons of fair value accounting

 It can create large swings of value that happen several times during the year

There are some businesses that do not benefit from this method of accounting at all. These businesses typically have assets that fluctuate in value in large amounts frequently throughout the year. Volatile assets can report changes in income that aren’t actually accurate to the longterm financial picture, creating misleading gains or losses in the short-term picture.

 Misery typically loves company

If one business is seeing a reduction in net income thanks to asset losses, then this trend typically creates a domino effect throughout a region or an industry. Downward valuations are

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contagious and often trigger selling that is unnecessary because of the volatility of the market.

When this method of accounting isn’t used and downward valuations don’t have to happen, there is more investor stability that can, in turn, keep a region or industry’s overall economics stable as well.

 It reduces investor satisfaction

Some investors don’t always notice that a company is using the fair value approach