Fair Value And Historical Costing Essay

612 words - 2 pages

Laux and Leuz’s view that lack of transparency under Historical Cost Accounting could make matters worse during financial crises, and could be evaluated using accounting theories focusing on the Global Financial Crisis (GFC). The discussion below looks at the measurement issues faced in a crisis and in particular, the Fair Value (FV) and the Historical Costing (HC) while focusing on the 2008 financial crisis. In the discussion, there will be comparison on which of the two makes the crises worse.
Fair value is the price received on sale of an item or transfer of a liability between the two willing parties at the measurement date. The three levels in which FV values its items include; Level 1 ‘mark to market’, level 2 ‘mark to similar and level 3 ‘mark to model’. Level 1 is used when quoted prices in active markets for identical assets or liabilities are available. Level 2 is used to cases for which there are no observable inputs while level 3 inputs are unobservable inputs like in model assumptions. According to Whittington (2010), FV is the single measure basis because of its relevance and reliability in efficient markets but it elicits a problem to FVA since market inefficiency and investor irrationality lead to volatile market conditions.
FV is viewed as an amplifier of GFC. This is because in times of liquidity crisis, prices never indicate the right discounted value of future expected cash flows but are determined by the available cash in the market at the time. In addition, marking assets to market prices in times of crisis is tied to several contracts and regulations making market prices to underestimate the fundamental values and distort portfolio and contract choices. This weakened the capitalization ratios of financial institutions. The financial institutions were forced to sell securities or close down positions on some financial instruments...

Find Another Essay On Fair Value and Historical Costing

cost information for decision making Essay

621 words - 2 pages Two common costing systems used in business are traditionally cost accounting system (job costing, process costing and operating costing) and activity-based costing system (ABC). There are some similarities and differences between these systems. Regarding the similarities, both accumulate product costs throughout the production process and assign those costs to individual units of production. Additionally, product cost under two costing systems

use standards asc Essay

3958 words - 16 pages into the issues that standard costing faces in this current economic environment, where globalisation, shorter product lifecycles and increased consumer wealth all of potentially negative impacts. The research has shown me that while these events might damage the value of standard costing, it is still a useful management tool. As well as broadening my understanding of standard costing, this paper has given me insight into other management tools

use statnd asc

3958 words - 16 pages into the issues that standard costing faces in this current economic environment, where globalisation, shorter product lifecycles and increased consumer wealth all of potentially negative impacts. The research has shown me that while these events might damage the value of standard costing, it is still a useful management tool. As well as broadening my understanding of standard costing, this paper has given me insight into other management tools

use stand 2 mexida

3965 words - 16 pages deeper into the issues that standard costing faces in this current economic environment, where globalisation, shorter product lifecycles and increased consumer wealth all of potentially negative impacts. The research has shown me that while these events might damage the value of standard costing, it is still a useful management tool. As well as broadening my understanding of standard costing, this paper has given me insight into other management

ghghgfjhcnv

3963 words - 16 pages into the issues that standard costing faces in this current economic environment, where globalisation, shorter product lifecycles and increased consumer wealth all of potentially negative impacts. The research has shown me that while these events might damage the value of standard costing, it is still a useful management tool. As well as broadening my understanding of standard costing, this paper has given me insight into other management tools

ADVANCED FINANCIAL ACCOUNTING

3413 words - 14 pages gains or losses are not recognised such as holding gains, inflation or depreciation. One of the main problems for historical cost is inflation which is the increasing price of general goods and services over time. Historical costing assumes the value of a currency does not change overtime therefore the purchasing power of the currency is constant. For example if a company purchased a factory where they manufacture produced goods for £50,000 in 1950

Absorption/Full Costing, Variable/Marginal Costing, and Activity Based Accounting

3100 words - 12 pages longer time frame. Although the system efforts to differentiate the fixed and variable costs, which however is not easy, hence any mistake in cost differentiating may lead to wrong decision making. With regard to valuation of inventory, since the inventory is valued at variable price in case of production damage the recovery value from insurance is unfavorable (Reinstein & Bayou, 1997). 1.2. Full/Absorption Costing As the name says “absorption

Cost Management

1173 words - 5 pages management and value creation. Management Decision, 32 (4), pp. 52--57. In-text: (Kren, 2008) Bibliography: Kren, L. (2008). Using Activity-Based Management for Cost Control. Journal Of Performance Management, 21 (2), pp. 18--27. In-text: (Norman, 2007) Bibliography: Norman, G. (2007). Life cycle costing. Property Management, 8 (4), pp. 344--356. In-text: (Reider, 2011) Bibliography: Reider, R. (2011). Cost management in tough times. Journal Of

Variable costing vs Absorption costing

1147 words - 5 pages fixed overhead incurred was $300 and non-manufacturing overheads are $100 per period.The variable and absorption cost statements for periods 1-6 are shown in Exhibits 1 and 2.Exhibit 1Variable costing statements:P1P2P3P4P5P6($)($)($)($)($)($)Opening stock--180 --180Production cost900 900 900 900 1020 840Closing stock-(180)--(180)(60)Cost of sales900 720 1080 900 840 960Fixed costs300 300 300 300 300 300Total costs1200 1020 1380 1200 1140

Usefulness and Reliability of Information Provided By Corporations

1685 words - 7 pages , and frequent buyer or seller in the market. "An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (FASB, 2011)." The valuation of fair value instead of historical cost gives users a better understanding of the company's financial

How International Financial Reporting Standards Affect The Quality Of Canadian Accounting Information

1846 words - 7 pages : providing useful information for decision making. Both of them are principles based and have the same conceptual frameworks. However, there are still some significant changes from Canadian GAAP to IFRS: the implementation of fair value, going concern exposure, revenue recognition, disclosure of “extraordinary items”, costing techniques, and segment reporting. (See Appendix) This change from IFRS to Canadian GAAP will benefit investors because

Similar Essays

Historical Cost Vs. Fair Value Essay

828 words - 3 pages The basic purpose of accounting is to provide information that is useful to investors, creditors and others in making rational economic decisions. One accounting issue that has been debated on a lot is the historical cost method versus the fair value measurement. The historical cost method has been the basis of GAAP accounting for the past decade but has slowly been disappearing. Today it is starting to be replaced by the fair value method of

Fair Value Accounting And Financial Crisis

1033 words - 4 pages their firm and their shareholders. The ensuing moral hazard would not disappear as long as the risks that are borne by the firm are not equal to the decision makers. It was rational for selfish “utility-maximizers” and therefore remained a major root of future financial crises. Works Cited 21. Pozen, R. C. 2009. Is It Fair to Blame Fair Value Accounting for the Financial Crisis? Harvard Business Review (November): 85-92. 22. Scott, I.E

"The Principle Of Historical Cost Is Still Used In Accounting When There Is A Large Measure Of Agreement That It Is Inappropriate." Discuss

1225 words - 5 pages alternative valuation methods, such as Fair value pricing and Replacement Costing, opens the door to manipulation of numbers as it must, in part, be speculative and thus subjective. Under Historical cost accounting there is no room for manipulation and the data is supported by evidence such as invoices, receipts, etc.The increased risk associated with Fair Value Accounting due to the high tendency of malpractice can also be detrimental to investor

True And Fair From The Accountants' Perspective

1754 words - 8 pages ’ value does not change at the same rate as with the fluctuation of market prices. Thus in appreciation to the shareholders, organizations should not be rewarded on the change in the market price, but should be rewarded on value adding; adding value to assets purchased by transforming them and selling at a marked up price (Penman 2007 p.38-9). This same issue is also present in regards to historical costing. When a fair value price is substituted