Template for Bachelor thesis in International Business
Benefits of Fair Value Accounting
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Fair Value Accounting US GAAP VS IFRS
Benefits of Fair Value AccountingMany trading organizations, investing institutions, and accounting academics have believed that fair value accounting surpasses the alternative accounting system, i.e., historical cost accounting system (Ryan, 2009). Some of the essential benefits include. These investors, appraisers, and accounting academics believed that fair value accounting would provide superior strategical and business information through financial statements (Ryan, 2009). The fair values are more current, timely, and comparable across different platforms such as investing, auditing, and accounting (Ryan, 2009; Skinner, 2008). The fair value accounting and fair values provide better information regarding future risk-adjusted discount rates and cash flows. The fair value accounting and fair values of the assets and liabilities must decrease the gap between the book value and true market value, thus decreasing the disparity and volatility. Then the book values can be treated as the actual market value of the assets (Damodaran, 2010). For Investors, the marked-up (down) assets will provide the firm's actual worth and help reduce variability in assessing firms' true value through cash flow valuation techniques (Da and Warachka, 2009; Damodaran, 2010). The fair value will self-correct itself according to the market sentiments and business strategy, including its ability to generate sustainable growth in cashflows (EPRA, 2016; Ian E. Scott, 2010; Ryan, 2009). This means the actual market value has already incorporated future growth estimates of earnings and cash flows. Fair value accounting stops earnings manipulation (Ramtohul, 2013; Ryan, 2009; Tkachuk, 2019). The fair value impact on P&L statements depicts actual earnings and changes according to market perceptions and value. According to (Ian E. Scott, 2010; Ryan, 2009), fair value accounting provides the best voluntary and mandatory disclosures for investors. These disclosures regarding fair value enable investors and appraisers alike to ask a question about retrieving fair value based on different levels. Another argument made by researchers (Gulin and Hladika, 21-22 April, 2016; Hitz, 2007; Ryan, 2009) that volatility induced by skewed cash flows provides more information to the investors and analysts. The skewness will give probabilities on future cash flows to the investors and help them to incorporate these probabilities into their expectations, which is like fair value accounting. This chapter has briefly discussed accounting systems, such as fair value accounting and historical cost method, and explained why fair value accounting differs from the other method. This chapter also provided the specific impact of fair valuation and revaluations of financial and non-financial assets on the financial statements. Due to its importance, financial statements provide all the necessary information, mandatory and non-mandatory disclosures to the investors to make a better economic decision based on the assets' actual market value. But no system is without its limitations, and there are some deep problems exhibited by applying a fair value accounting system. The next chapter will deeply introspect the issues that created a dilemma for the practitioners, analysts, investors, and accountants based on fair value accounting and its impact on earnings cash flows and specific vital financial ratios. Download 383.21 Kb. Share with your friends:
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