Question

Disadvantages of air value accounting . discuss

disadvantages of fair value accounting. Discuss

Answer 1

Fair Value Accounting:

This method of accounting use current market price of Assets and Liabilities that means assets is recognised at the price at which assets can be sold and liability is recognised at the price at which it can be settled. The fair value is derived on the basis of current market condition.

Disadvantage of Fair Value Accounting

Following are the disadvantages of Fair Value Accounting:

1. Objectivity is not important: In this accounting Objectivity doesn’t matter. It will consider market value of the assets and liability either it is used for long term or short term. For Eg. If any asset available is intent for sale then the sale value in case of rushed sale is lower than market price but in books it should be considered on Fair value.
2. Lack of Conservatism: The asset and liability both will be considered at fair value either there is profit or loss. So as per Fair Value if Assets value in market gets increased then management will report higher income. The income is unrealised.
3. Excessive Income Volatility: Most serious concern to opt this model is that the income is excessively volatile on the basis of market. There is no any certainty in Financial Statement. In financial statement assets are higher than income and because fair value change according to market position so the reporting income is excessively volatile.
4. Absence of Market Price: If market price of the assets is not available in the market then it is difficult to obtain correct fair value.
5. Manipulation: Manipulation of Price at firm level is a big risk in case of fair value accounting.
6. This Accounting is not fully reliable to follow. It is relevant for a limited period and limited purpose.
7. Price Variation: Another disadvantage of this accounting method is the vagueness of measurement procedure of assets creates loopholes in financial statement. The is so many ways to calculate fair value which will result in different Fair Value.