Measuring Fair Value Accounting Standards - 1346 Words

Fair Value accounting is a measurement application to value assets and liabilities based on current transactions among buyers and sellers in the market. In other words, the price market participants pay or receive in an orderly transaction at a certain date. There are different techniques for measuring fair values depending on asset and market activity. It includes market approach, cost approach, and income approach. Financial Accounting standards (FAS 157) defines fair value as â€Å"the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date† (FASB, 2006). Different levels of inputs are also utilized in measuring values of assets and†¦show more content†¦In contrast, Historical Cost accounting is defined by recording assets or liabilities on its acquired cost. The nominal value that a company paid for an asset or recorded a liability. This measurement is based on a co st principal that states to record assets/liabilities at the acquisition value. In this approach, assets or liabilities are adjusted to its net realizable value in a systematic manner. For example, depreciation of fixed assets, amortization of intangible assets, and depletion of natural resources. These rational and systematics approaches to adjust assets’ value to bring these instruments to its carrying value, deviating from the recorded historical cost. HCA (Historical Cost Accounting) and FVA (Fair Value Accounting) measurements techniques are accepted by both accounting standard setters FASB (Financial Accounting Standard Board) and IASB (International Accounting Standard board). Under both measurement approaches, there could be significant differences in reporting, measuring, adjusting, and disclosing values of assets and liabilities. GAAP (Generally Accepted Accounting Principles) and IFRS (Internal financial Reporting Standards) mostly apply fair value concepts to fina ncial assets and liabilities up to certain extent. On the other hand, HCA is usually used for fixed assets e.g. property, plant and equipment. FVA measurements are not fixed and fluctuate due to market volatility, but HCA values are mostly fixed and change under certain