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fair value accounting
Fair Value Accounting
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Fair Value Accounting
Fair value accounting contains a superior basis for financial reporting than the outdated historical cost model. FROM: SEP-OCT 2005 ISSUE | BY HAN DONKER
In recent years, international standard setters and regulators such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have begun to favour the use of fair value accounting over historical cost accounting in financial reporting. A key reason for this shift in methodology is to improve the relevancy of the information contained in financial reports. The general principle underlying the shift is that up-to-date information improves investors' and regulators' abilities to make informed decisions.
To date, the fair value concept is applied in several IASB standards, such asIAS 16Property, Plant and Equipment; IAS 37Provisions, Contingent Liabilities and Contingent Assets; IAS 38Impairment of Assets; IAS 39Financial Instruments; IAS 40Investment Properties; IAS 41Agriculture;IFRS 2Share-basedPayment; and IFRS 3 Business Combinations.
In Canada, the Accounting Standards Board (AcSB) is considering the adoption of International Financial Reporting Standards (IFRS), which are based onfair-value accounting. Notably, the AcSB is working on a research project on behalf of the IASB to analyze various measurement bases for financial accounting. Part of the project focuses specifically on the use of fair value accounting, and the AcSB plans to release a discussion paper prior to the end of the year.
Fair Value Concept
Standard setters define fair value as the amount for which an asset or liability can be exchanged between knowledgeable, willing parties in an arm's length transaction. In an active market, fair value equals observed market price. If there is no active market, fair value is an estimate of value
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