Essay: Measurement of Financial Instruments

Sample Essay

In my opinion the measurement of financial instruments at fair values mostly affected banks and financial institutions which they charge led to their failure. The standard setting bodies on the other hand linked the financial crisis to heavy investment of these entities in risky assets. The debate between banks and standard setters paved the way for review of fair value standards by standard setters.

I agree with the fact that fair value accounting standards were developed by standard setters to eliminate misrepresentation of values which arise through recording of assets at historical cost and this increased the reliability of financial statements. Although assets and liabilities have long been presented in financial statements at historical cost but these values are irrelevant for investors, shareholders, creditors and other users of financial statements to make informed decisions. The recent practice of recording these assets and liabilities on fair values is though more reliable and relevant to users but lacks proper guidance to help these users in understanding how fair values are actually estimated. The recognition of several assets on fair values causes a lot of problems for banks as fair value standards lack proper documentation for recognition and recording of assets on fair values which cannot be linked or compared with an underlying market to estimate fair values. The standard setting bodies need to fill this gap between theory and practice of fair value accounting.

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