Question

​​​​​1)Briefly describe what is the fair value option. Is this option more useful than the historical cost for certain types of assets and liabilities?

2) As you mentioned " Fair value is useful than historical cost when it comes to assets whose value can appreciate over time."' and you are correct. But to add, what about the flip side. Lets keep in mind that fair value fluctuates... that asset that has a fair value of $3 M dollars this year may have a fair value of $2 M dollars next year. This means that the company has to write the asset down and recognize a loss on its books of $ 1m . This may not be pleasing to stockholders. QUESTION : Should a company be allowed to write- up and write-down assets resulting in paper gains and losses to recognize fair value accounting

3) Fair value is a market-based value. Meaning, it is the price of a sold asset or the payment of a transfer to a liability at the present date. This is also called the fair value principle. Fair value is used by companies for certain types of assets and liabilities because it provides more relevant information about future cash flows. The historical cost has the advantage of being verifiable. This principle is mostly used by companies that compute their net income every month because it provides a verifiable benchmark that can be used to place a sales value each time they want to determine their income. But fair value is considered more useful than historical cost because it reflects the equivalent value on financial tools. what is your opinion ?

Answer 1

Note:We’ll answer the first question since the exact one wasn’t specified.

Answer 1. The question is based on the concept of accounting of fixed assets. Company can use either historical cost method or mark to market cost accounting for fixed assets.

The mark-to-market also known as fair value accounting registers the actual value of an asset in book of account. The approach explains the estimated price of asset that can be used to replace the actual asset at current market condition.

· Provides accurate and relevant information about asset

· Record the price that an asset would sell for today

· The method can be a risky preposition when market are volatile.

· More Time consuming to calculate actual price to each available assets