Question

Discuss the advantages and disadvantages of using fair value to measure the elements reported on the balance sheet. Include specific examples, and connect your response to the conceptual framework.

Answer 1

Advantages of fair value measurement

1. Every asset and liability can be reported at the capacity of generating cashflows or requirement of cash flows.

2. By using fair value measurement we can exactly as a time the position of the organisation.

3. Fair value measurement is more practical compared to cost method or net realizable value method.

4. The following fair value measurement we can make better provisions and reserves for the future requirements.

5. By using fair value method we can exactly estimate the cost of production sand profit margins earned by the organisation and we can make reliable projections for the future based on this field value measurements

Disadvantages of fair value measurement

1. Ascertaining the fair value of a particular asset and liability requires too much of professional judgement and more skill and knowledge.

2. Cost of hiring of the professionals who are able to make fair values of a particle items is very huge which cannot be affordable by a small business organisations.

3. Till now usage of a value measurements is not in large scale, due to this reason the financial statements prepared following fair value may not be perfectly compared with another financial statements.

4. estimation and assigning values of certain contingent assets and contingent liabilities is very hard, due to this reason wireless setting and reporting those type of items may become material misstatement in the financial statements.

Examples :-

ascertaining the value of depreciation of a plant and machinery under fair value method cannot be measured exactly.

Estimation of cash inflows and outflows in case of contingent assets and contingent liabilities becomes very hard under fair value measurement. If anything gone wrong under fair value measurement it may leads to material misstatement.

Fair value measurement of expenses and income leads to increase in net profit of the organisation.

Valuation under fair value method increase in professional judgement and updated information about the market and organisation.

By all the above discussion we can conclude that fair value measurement exactive perfect in conception but it may be a bit difficult while in the implementation phase.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.