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Discuss the two objections to the use of fair value measurement referred to above, and critically examine how far they are valid - Essay Example

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Name: Tutor: Course: Date: University: The FASB (Financial Accounting Standards) and IASB (International Accounting Standards Board) are to a great extent utilizing the fair value method of measurement in place of historical cost method. Cynics are, however, still not contented with this move…
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Discuss the two objections to the use of fair value measurement referred to above, and critically examine how far they are valid
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Discuss the two objections to the use of fair value measurement referred to above, and critically examine how far they are valid

The first objection says that the method is, thus, not good for financial reporting while the second says that the method will be against the stakeholders and investors’ interest. This study seeks to analyze fair value measurement method in accounting in light of the aforementioned objections. Before embarking on the study’s purpose, it is of essence, though, to define fair value as given by IASB. According to IFRS 13, Fair value is that price that one would receive if he/she disposed an asset or paid to ensure an obligation’s transfer in an orderly kind of transaction between players in a market at the date of measurement. IFRS 13 is there to increase comparability and consistency in measurements that use fair value method and the disclosures that go in tandem through what is referred to as ‘fair value hierarchy’. This hierarchy categorizes the inputs that are usually utilized in the techniques of valuation into three main levels. This hierarchy prioritizes at the top, the unadjusted/quoted prices for identical liabilities or assets and in active markets. The lowest priority is given to unobservable type of inputs. The levels of inputs are explained as under. Level 1 inputs refer to the quoted prices in the active markets for liabilities or assets that are identical that the entity can get at the date of measurement. ...
Those scholars who are against this method argue that fair value method presents information that is unreliable since it is not usually based upon transactions at arm’s length. Thus, it should not be used when it comes to investors’ making financial decisions. Under its reliability, cynics say that it is not a reliable measurement method. Some of the scholars against this method like Cunningham Colleen, the president of FEI- Financial Executives International, said that the information that is generated by this method cannot be of any relevant use to an investor. According to Cunningham, it is in fact useless to an investor. Income statements are subject to manipulation if this method is applied in measurements. (Shortridge et al, 2006) Fair values are not applicable in cases of firm’s arbitraging of market prices. It is not an appropriate method especially when a firm adds value for stockholders by way of purchasing at input prices of the market and disposing at output prices of the market. In this case, the argument is that the raw materials applied in the process of manufacturing do not gain their value from a variance in their exit prices in the market, but as inputs into processes which add values to the existing market prices by making a product as well as selling the same to consumers. This is because a variance in the value for stockholders is not really connected to a variance in the prices of the market. Thus, as a form of stewardship stockholders should be rewarded by the management through other basis, but not using market values. Also efficient prices are reliant on historical costs and, thus, fair market value measurements cannot serve as substitutes under this kind of scenario. The ... Read More
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