Fair value accounting is increasingly being adopted by many countries across the world.
There are many measurement considerations that managers need to be aware of when making subjective valuation estimates of their firms’ financial instruments.
Understanding these measurement issues aids managers in considering how best to manage their firms’ assets and liabilities in a fair-value-driven accounting regime.
Recent initiatives by both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have increased the use of fair value accounting for financial reporting across many jurisdictions around the world. There are many issues surrounding fair value accounting. This article outlines the main measurement issues contained in the fair value accounting standard used by the FASB (SFAS 157), and that used by the IASB (IAS 39).
The Rationale for Fair Value Accounting
The increasing use of fair value accounting in financial reporting came about because accounting standard setters have debated, and come to the conclusion that fair value appears to meet the conceptual framework criteria better than other measurement bases (for example, historical cost, amortized cost, among others). Notwithstanding this rationale, a major issue with fair value accounting is the difficulty of measurement (“subjective estimates”) when financial instruments do not trade in active markets. Both SFAS 157 and IAS 39 provide measurement guidance as to how firms should compute fair value estimates in such a situation.
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