Categories: Accounting

Fair Value Accounting

Assets are shown in the balance sheet at the historical cost i.e. cost at which they were acquired. But it is not the case always that the assets presenting the values in the balance sheet are actually worth for that. There may be the case that actual value based on current market price is worth more or less than the value in the balance sheet. Some assets in the balance sheet such as land and building are generally worth more in the market than the value shown in the balance sheet at which they had been acquired many years ago. Therefore, conventional balance sheets often undervalue the companies’ assets.

[linkunit]To overcome the issue fair value accounting has been widely supported for where it is required that assets in the balance sheet should be presented at their current market value also called fair value. Formally speaking fair value is the rationalized and impartial approximation of the impending market price. Fair value is determined through the following aspects.

• At what cost the same asset in the same condition can be acquired, produced, replaced, or substituted.

• What is the actual utility of the asset? It means present value of future cash flows generated from current asset.

Example

Firm A purchased a piece of land in 1990 for $10 million. The historical-cost financial statement would still record the land at $10 million in the balance sheet. If firm B purchased a similar piece of land in 2008 for $20 million, then it would report an asset of $20 million on its balance sheet.

In fair value accounting the land with Firm A will also be recorded at $20 million because at the historical cost grounds the balance sheet would be undervalued by $10 million.

[adsense]

kasi

View Comments

  • Posts go on the front page and move down. You don't want to write a post, you want to write a page. There's a button for it right there on your dashboard.

Recent Posts

Porter’s Five Forces of Microsoft

Microsoft Corporation also known as MS is one of the biggest multinational technology-based company in…

2 years ago

Porter’s 5 Forces Analysis of Fast Food Industry

The article is based upon in-depth analysis of Fast Food Industry of Australian Region with…

2 years ago

Apple Inc. – Porter’s Five(5) Forces Analysis

The paper presents detailed overview about the Apple Inc. analysis on the parameters set by…

2 years ago

Marketing Plan – Thomson Holiday Group

The purpose of this research paper is to develop a marketing plan for the Thomson…

2 years ago

Case Study – Jerk Stars Ltd- Sales and Marketing Human Resources Dilemma

1. As applicable to other department managers, a human resources manager invigilates the departments and…

2 years ago

KFC Jamaica – Operation and Services Flow

The purpose of the present article is to formulate a work allocation flow chart of…

2 years ago