Fair value accounting Coursework Example | Topics and Well Written Essays - 2500 words

Fair value accounting - Coursework Example Fair value accounting has been an important aspect of US GAAP (United States Generally Accepted Accounting Principles) for over five decades yet its implementation increased significantly since issuance of Fair Value Measurement Standard (FAS 157) in 2006 by the Financial Accounting Standards Board (FASB) (Ryan, 2008; Khan, 2010). Fair value accounting, which is also known as mark to market accounting, gained considerable amount of spotlight as a result of its controversial role in the financial crisis of 2007-08. Critics argued that if fair value accounting does not have direct role in the crisis, it at least exacerbated the severity of the crisis. The prominent allegation suggests that fair value accounting results in heightened leverage during the market boom period while market bust resulted in excessive write-downs. The write-downs resulted capital depletion for financial corporations, required them to sell assets, and thereby initiated downward spiral (Ryan, 2008; Laux and Leuz, 2009). The paper scrutinizes the accusation against the accounting approach with respect to various facts. Additionally, the paper assesses benefits and weaknesses of the fair value accounting which has further been compared with traditional accounting for better evaluation. i. In an illiquid market, fair value accounting can be considered as a weakly defined concept that focuses on hypothetical transaction price which cannot be measured in a reliable manner irrespective of any kind of guideline that is provided by the FASB. ii. Studies suggest that when fair value of an asset or a liability is determined from a source that is different from the liquid markets, the scope of engagement of the corporation in certain accounting behaviour such as discretionary income management increases due to unverifiable nature of the information regarding fair value. iv. Under this accounting approach, recognition of