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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
Author : brekkenatalie
Finance & Accounting
Pages 8 (2008 words)
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…
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. ...