Adavanced Financial Accounting

1956 words

Abstract

Fair value accounting shows a truer and fairer view of the company's real financial situation to the users of financial statements to make decision. However, the profit reflected by fair value is not true and fair value can not provide relevant information that goes with income and expense to determine the operating results.

Introduction

Fair value accounting is a measurement that has been used widely. The detailed benefit and limitation of fair value accounting are shown in the report.

The report will regard the benefit of fair value accounting related to decision making in Part A. In addition, the limitation of fair value accounting will be discussed in Part B. Furthermore, the example of how fair value accounting is applied will be shown in Part C.

Part A

The usefulness of fair value accounting related economic decision making will be discussed in this part.

Fair value is the price at which the asset can be sold or liability can be paid based on the current market price or estimated cash flows when market participants conduct regulated transaction at the measurement date. Fair value which provides comparability of the value brought by financial instruments at different times reflects current market conditions. Fair value measurement shows a truer and fairer view of the company's real financial situation to the users of financial statements. In addition, financial disclosures measured by fair value provide detailed prevailing market values to investors ,which does good to ensure the usefulness of financial reports. “Fair value information is closer to that which institutions themselves use for management purposes, which contributes to introducing appropriate incentives between managers and investors.” （Jose，2008）Fair value accounting shows the information obtained at each point of time included in financial institution. What is more, confidence will be henced when investors confirm that the information provided by financial...