Financial statements are accounting reports prepared in order to communicate the information about financial performance, financial position and cash flow of a company to stakeholders. These statements should disclose information on the earning capability and financial position of a business firm indicating clearly its present and future ability to generate favourable cash flows which is the object of prime interest to all users of financial statements. Thus, the financial statements should report the true earning of the enterprise and its true asset and liabilities. But the historical cost based financial statement can never satisfy the true objective of preparing the same. In fact, they fail to reflect the ‘true and fair’ view of the financial state of affairs of the company. Under the historical cost based accounting system, the depreciation is, generally, undercharged; cost of inventory is undervalued, thus, overstating the earning of the concern.

1. Usefulness of Fair Value
Accounting-An Appraisal
By
Rupa&Rupesh Yadav

2. Flows of the presentation
o Introduction
o Concept of Fair Value and Fair Value Accounting
o Theoretical Background
o Usefulness of Fair Value Accounting
o Concluding Remarks

3.  Financial statements are accounting reports prepared in order to communicate the
information about financial performance, financial position and cash flow of a
company to stakeholders. These statements should disclose information on the
earning capability and financial position of a business firm indicating clearly its
present and future ability to generate favourable cash flows which is the object of
prime interest to all users of financial statements. Thus, the financial statements
should report the true earning of the enterprise and its true asset and liabilities.
But the historical cost based financial statement can never satisfy the true
objective of preparing the same. In fact, they fail to reflect the ‘true and fair’ view
of the financial state of affairs of the company. Under the historical cost based
accounting system, the depreciation is, generally, undercharged; cost of inventory
is undervalued, thus, overstating the earning of the concern.
Introduction

4. Cont.
 There is a problem of replacement of the asset and financial strain on business.
Moreover, the historical cost based accounting system does not make any
distinction between holding gain and training surplus. In fact, this system has
no mechanism for isolating holding gain from trading margin. As it is well
accepted that most of the items disclosed in the financial statements under the
historical based accounting practices are not properly measured, a clear
distortion always persists in these statements. As a result the interpretative
value of the financial statement is also distorted. In order to overcome these
inherent limitations, several attempts have been made from time to time by
different authorities and accounting experts to develop alternative accounting
systems the latest in these field is fair value accounting.

5. •
Concept of Fair Value and Fair Value Accounting
 Fair Value :The term fair value may be defined as the highest
price at which a property would change hands between a willing
buyer and willing seller when the latter is not under any
compulsion to sell, both parties having reasonable knowledge of
the relevant facts.
 Fair Value Accounting: The term Fair Value Accounting is a
system of accounting under which the monetary value of an item
of asset or liability is measured based not on the past transaction
amount but on fair value.

6. Theoretical Background
 The concept of fair value was applied by International Accounting Standard
Committee (IASC) in the following accounting standard:
 IAS 26- Accounting and reporting by retirement benefit.
 IAS 33- Earning per share
 IAS 36-Impairment of asset
 IAS 38- Intangible assets
 IAS 39- Financial Instruments: Recognition and Measurement
 IAS 40- Investment property
 IAS 41- Agriculture
 Financial Accounting Standard Board (FASB) of US also used the concept of fair
value in its several standards.
 The Statement of Financial Accounting Standards (SFAS) 141- Business
Combination
 The Statement of Financial Accounting Standards (SFAS) 142- Goodwill and other
intangibles assets
 The Statement of Financial Accounting Standards (SFAS) 144- accounting for
impairment or disposal of long-lived assets

7. Usefulness Fair Value Accounting
Benefits:
 Reliable Information
 Accurate Information
 It provides a measurement of true income
 Timely information
 More information in the financial statements than
historical cost
.

8. Limitations:
 Limited reliability
 Volatility
 Absence of a market price
 Manipulation
 Misleading Information

9. Conclusion:
 On the basis of the advantages and limitations of concept of FV in
accounting it can be clearly stated that this concept is far from being
perfect but its importance in the area of corporate financial accounting and
reporting specially during post-liberalisation era when economy is
changing very rapidly throughout the world cannot be ignored. The concept
of FVA has already be appreciated by the leading accounting standard
setting agencies of the world and by the large its usefulness has also been
acclaimed in the literature. Hence considering the significance of FVA,
proper initiation should be taken jointly by the professional bodies both at
the national and international level in respect of formulation of generally
accepted fair value measurement

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