Essay: Fair Value Accounting and Current Environment

Sample Essay

The standard setting for measurement and recording of financial instruments has imposed quite a few complications for the standard setting bodies. The FAS 157 issued in 2007 explained the concept of Fair Value Accounting and FAS 159 enabled the companies to measure financial assets and liabilities through the fair value model. This standard was adapted by AASB and FAS 139 of AASB was issued to facilitate companies in Australia to measure and record financial assets and liabilities based on fair values.

The recent economic crisis and the resulting liquidity crunch made fair value accounting a point of debate. Fair Value Accounting can be easily applied to all assets and liabilities of a firm but it is hard to ascertain the value in case of financial instruments like derivatives and mortgage-backed securities as these instruments depend on liquidity and changes in the market. Although FVA provides greater transparency and values of financial assets to investors it also complicates matters for the management of a company. The two most relevant arguments about FVA are the valuation of assets related to markets with low or no liquidity and when FVA should be applied for the valuation of assets. The economic crisis caused a lot of corporations specially the banking sector to write down a significant amount of values due to fair value measurement. Under this standard the companies are required to recognize unrealized gain or loss resulting from the application of Fair Value Accounting.

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