Hello I need help a respond to peers’ discussion:
In your responses to your peers, discuss the impacts of fair value as they relate to organizations that regulate accounting practices. What should businesses do to ensure alignment with them in their accounting practices?
Peer #1
The use of fair value accounting has impacted the professional field by providing a valuation of businesses’ assets and liabilities depending on the variations of the ever-changing market. This practice has caused controversy, and it has been criticized for contributing to the global financial crisis (Mccollum, 2008). Businesses should consider whether or not to choose this type of measurement for certain financial assets or liabilities, and if so, it must separate them from similar financial assets and liabilities that are reported using historical cost methods (Wahlen et al., 2017). Such decisions should be shown consistently in their financial statements during the life of those assets or liabilities. Moreover, a company should present extensive disclosures required by US GAAP and IFRS to allow external users to assess the reliability of the values used in these financial statements (Wahlen et al., 2017).
According to the article Relevance and Credibility of the Fair Value Measurement during the Crisis (Sebastian et al., 2014), financial users not only expect to learn about historical costs but also want to find information about the future of a company. In times of crisis, managers, lenders, and creditors must notice that these changes in valuation can contribute to uncertainty due to the subjective nature of fair value estimates using Level 2 and Level 3 during the interpretation of financial statements (Wahlen et al., 2017).
Stakeholders should consider both the advantages and flaws of fair value assessments. For instance, fair value accounting provides current and reliable information based on the market, which facilitates comparability with other entities (Sebastian et al., 2014). However, this option also creates difficulties in determining market values, which can be specific and sometimes based on market predictions (Sebastian et al., 2014).
Peer #2
Fair Value Accounting has been a subject of discussion since it was first implemented. There are benefits and drawbacks. According to Ardi Tjiang Y. Suryady in the article Basic Concepts of Fair Value Accounting Method and Impact on Financial Statement “application of fair value method can increase the transparency, accountability, and comparability between financial statements” but its weakness lies in the income statement.
In Fair Value Under Fire states that Fair Value Accounting brought to light many risky investments on corporate books. One of the challenges faced by both the FASB and IFAC Boards is obtaining reliable information and transparency. These issues can lead to mistakes and risks. The IAASB 545 “calls on external auditors to obtain sufficient evidence that fair value measures and disclosure conform with the organization’s financial report framework. In “PCAOB says 42% of auditors botch quality reviews” by Jim Tyson published Oct. 13, 2023 stated that the Public Company Oversight Board stated that there was a 5% increase in botched reviews since 2020 and that the trend is troubling.
The issues with Fair Value Accounting become apparent in a distressed economy, when according to the Financial Accounting Standards Board, it is especially critical that fair value information be available to capital providers and other users of financial statements in periods of market turmoil accompanied by liquidity crunches’ ‘ . Robert Pozen, wrote in “Is it Fair to Blame Fair Value Accounting for the Financial Crisis?” that to meet the needs of both bankers and investors, regulatory officials should adopt new multidimensional approaches to financial reporting.
Each business or institution needs to determine which accounting method best reflects their business in the current economy. For example, working in the produce industry if the business decisions, i.e. investments were based on last year’s sales we would be ending this year in the negative as last year was the best year of the company. That is why historical accounting is used when negotiating credit lines and other financial decisions.
