Fair Value Measurement Essay

2346 Words Apr 2nd, 2015 10 Pages
FAIR VALUE MEASUREMENT: IMPLEMENTATION ISSUES AND CHALLENGES (PART 1) (by Tuam Kwok Choon and Ng Kean Kok)

INTRODUCTION Since the promulgation of fair value accounting by the International Accounting Standards Board (IASB), the subject matter has been hotly debated by industry players and professionals of the accounting fraternity the world over. Many problems and pitfalls have been highlighted on the "mark-to-market" premise. For example, David Gwilliam and Richard H.G. Jackson (2008) noted that Enron "was able to 'monetize' physical assets so as to bring them within the remit of mark to market accounting", suggesting misuse of fair value measurement. Fair value is said to be superior to other forms of measurement because it is easily
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The application of the exit price as a basis for determining fair value may lead to a so-called “Day one” gain or loss when the transaction price differs from the exit price.

Any gain or loss arising from a difference between the entry and the exit price at initial recognition is recognised in profit or loss under SFAS 157, even when the fair value of the asset or liability is determined to a large extent using unobservable market data. The standard includes a three-level hierarchy for determining fair value
(Source: International Accounting Standards Board (2006), Discussion Paper: Fair Value Measurements)

RATIONALE FOR FAIR VALUE The main reason put forth to support the use of fair value is that historical cost accounting method of preparing financial statements is less relevant, especially given that prices and values of assets and liabilities change frequently and in certain cases, fluctuate significantly. Financial statement prepared using fair value approach may provide more accurate information on current values of assets and liabilities in a firm. It has also been argued that the world’s economic environment has changed significantly, given the sweeping reforms and changes in regulations, sophistication of consumers and development of new valuation methods. This has in turn resulted in different ways by which values are created and in turn

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