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Defining "Fair Value" Essay

1561 words - 6 pages

IFRS: Companies may use either historical cost or revalued amount. Revalued amount is fair value at date of revaluation less subsequent accumulated depreciation and impairment losses (Touche, 2009). Canadian and U.S. GAAP use historical cost as the basis of measurement for property, plant and equipment (Touche, 2009). Revaluations are prohibited in both Canadian and U.S. GAAP (Touche, 2009). So what does that mean for companies not sure of what to choose or needs guidance? Even when a particular IFRS lacks guidance, the application of the IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is required to the company or auditors for fair value guidance in other standards (IFRS, Developing common fair value measurement and disclosure requirements in IFRSs and US GAAP, 2010). Now that is a section that I have not investigated into. With the time given, one would have to spend long hours studying all the regulations and standards just as understanding Tax accounting. There is always something more or even ways around to make the picture of financials look the way one would want.

Historical cost principle under GAAP requires companies to report their assets and liabilities at purchase price rather than fair market value. Historical cost provides information that is consistent and removing the opportunity of being fraudulent towards a companies goals. Most U.S. companies believe this is a true figure and way of stating the asset. There are those that believe differently as well. Some investors would argue that the fair value price of an asset is more relevant but it does not provide information about current values which could sway investors if there are large differences. Historical costs are seemingly only important when gaining the asset because the amount remains unchanged while on the books.
Revaluations can be less consistent than historical cost measurements but with the revaluation method, it provides corporations the opportunity to control the bottom line for their benefit. If a corporation chooses to use the revaluation method, it will need to provide separate records for tax purposes in order to properly document. Tracking the cost and carrying amount of each asset, as well as to make the necessary depreciation and other determinations under the U.S. tax law (Coopers, 2009) will be very costly and time consuming. Again, there is not a set time when revaluation is to be completed and how many times it can be revalued. Thus, this allows for room to misstate.
If a corporation elects to revalue their assets and liabilities, it may also affect the company’s state distribution factors. By choosing this option of revaluation, corporation must consider that it could impact the effective tax rate and cash tax liabilities when completing their taxes as well as the property tax liabilities (Coopers, 2009). “For capital-intensive companies, property, plant and equipment may account for over 25% of their balance...

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