Template for Bachelor thesis in International Business
Fair Value Accounting has Limited Reliability
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Fair Value Accounting US GAAP VS IFRS
Fair Value Accounting has Limited Reliability.The fair value accounting marks the assets and liabilities to the market instead of carrying at their historical costs on the balance sheet. The marking-to-market process leads to subsequent revaluations of assets under the revaluation method in IFRS – as the historical cost method under both US GAAP and IFRS does not allow marking the assets to market (Jaijairam, 2012; Johansson, Hjelström and Hellman, 2016). Fair value measurement under the revaluation and fair value model is one of the most critical and complex sections with high unreliability. The fair values are taken from market transactions that may or may not reflect the Asset's actual value under consideration (Schildbach, 2011). Figure 6 Fair Value Hierarchy and Reliability Level
Level 1 is the most reliable and market value obtained through a liquid and quoted market for identical assets. Level II is less reliable as the value of similar assets is obtained from quoted or unquoted markets. The level III valuation is a source of discomfort for the investors, appraisers, and accountants due to its unverifiable nature (Skinner, 2008). There are multiple complexities when it comes to valuing assets using the level III fair value measurement disclosure. First, the value disclosed in the financial statements relies heavily on the accountants' judgment and professionalism(Michael D. Greenberg et al., 2018; Schildbach, 2011). The data provided to the accountants consists of management's future cash flow estimates, growth assumptions, and inputs which cannot be compared and corroborated with the market data (KPMG, 2021). So, in the absence of high corroboration and matching market data, it is difficult for the investors and appraisers to establish the Asset's fair value. Secondly, accountants are in the driving seat to make sense of the limited data and transform it into fair value that might not reflect the Asset's actual value – and these accountants may or may not have the required exposure and credibility of valuation. Level III valuation is used when there is a crisis, such as the credit crunch of 2008, where markets are illiquid and limited or no data available to price the Asset. According to research conducted by (Song, Thomas and Yi, 2010), investors and market value each $ of level I, II & III at 0.98 $, 0.97& and 0.68$ which shows that investors and appraisers, including the market, has limited reliability towards level III valuation. Download 383.21 Kb. Share with your friends:
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