Pros and Cons of Fv

As of 2011 public firms in Canada are required to report their assets under fair value accounting rather than historical cost. Fair value accounting is the process of valuing a firm’s assets and liabilities at market value. Why would firms do this, according to Tim Reeson of cfo.com, “The theory of fair value is that a company's financial statements are most useful to investors if the company's assets and liabilities are constantly reported at market value” (Reeson, 2008). While historical cost is just the process of valuing assets and liabilities at the price that the firm had paid for them.

Under the fair value method a firm’s earning could be affected by the market value of its assets and liabilities. For example if their assets had an increase in their market value, the firm’s earning would see a rise. But if the assets decreased in market value so would the firm’s earning. Many CFO’s views aren’t favorable to the concept of fair value accounting because “it makes their company’s bottom line numbers move up or down in ways that they can’t control” (Reeson, 2008). Thus it is time consuming for them because they have to explain to their investors that the financial results are moving up and down. Firms would rather use a mix model accounting system, which uses a combination of historical cost and fair value accounting rather just being forced with using the concept of fair value accounting. So that raises the questing is fair value accounting provide more useful information about the firm’s performance and value or would investors be better off if firms used the mixed model approach to value their assets.

Fair Value accounting is made up of three ranks that depict the level of fair value estimates.(Katz, 2008).Level 1, where assets and liabilities which are quoted to actual prices on an active market. Level 2, where assets and liabilities are valued in accordance with information not linked to quoted prices from level 1 but still using “observable...