Question

With reference to Penman (2007) and Laux, C., & Leuz, C. (2009), discuss the main issues related to use of the fair value measurements.

Answer 1

1. Fair-value accounting contributes to excessive leverage in growings periods and leads to excessive write-downs in down periods.

2. It is easier to measure liquid assets, but having an measure for illiquid asset can be conflicting.

3. It can create e contagion in financial markets​, i.e. if one has to sell his asset at lower than ifs FMV due to some reasons than other person has to take that basis and devalue his asset which can create not true measurements.

4. Another issue to address is the balance between relevane and reliability. As stated by Laux and Leuz, Relevant accounting information is capable of confirming decisions that stakeholders have already made and/or of making, and reliability requires that accounting information to be independently verifiable, unbiased, and an accurately portray the underlying reality of the transactions and events.