Critically discuss the arguments for and against the use of fair values in the preparation and presentation of financial statements Cite literature to support your answer

0 Comment

As the report explores financial statements need to be comparable from one year to the next and between one company and another. However, even though fair values may be said to be current and therefore more comparable, the fact that judgement need to be exercised brings subjectivity into play. In addition to that, those judgements on which investors and other stakeholders depend have their own agenda. In some cases they may exercise their judgement in such a way as to manipulate the accounts. This therefore brings us back to the reliability of the figures in the financial statements.
This essay stresses that the arguments against fair value accounting appear to outnumber those in favour. Most of the arguments against essentially relate to the classification of financial instruments the fair value hierarchy. According to Ernest and Young the 2008 amendment of the International Financial Reporting Standards (IFRS) requires that the classification of financial instruments be recorded at fair value in a hierarchy consisting of three levels. The first levelrelates to quoted prices that have not been adjusted for identical assets and liabilities in active markets. The second level relates to input prices but excludes quoted prices which are included in the first level and which can be observed directly for assets and liabilities, in the form of prices or in the form of derived prices indirectly. The third level relates to both assets and liabilities that are not based on market data that can be observed.