All of the following are disadvatages of fair value use except: a)fair values mi
ID: 2433683 • Letter: A
Question
All of the following are disadvatages of fair value useexcept: a)fair values might not be readily obtainable b)fair value may cause more flucuations as change occurs fromperiod to period c)comparibility between companies may be impacted by differentfair value measurements d)fair vaules can oly be use on balance sheets All of the following are disadvatages of fair value useexcept: a)fair values might not be readily obtainable b)fair value may cause more flucuations as change occurs fromperiod to period c)comparibility between companies may be impacted by differentfair value measurements d)fair vaules can oly be use on balance sheets a)fair values might not be readily obtainable b)fair value may cause more flucuations as change occurs fromperiod to period c)comparibility between companies may be impacted by differentfair value measurements d)fair vaules can oly be use on balance sheetsExplanation / Answer
All of the following are disadvatages of fair valueuse except: d)fair vaules can only be use on balancesheets All of the following are disadvatages of fair valueuse except: d)fair vaules can only be use on balancesheets d)fair vaules can only be use on balancesheets
An explanation follows as below : In accounting,fair value is used as an estimate of the market value of an asset(or liability) for which a market price cannot be determined(usually because there is no established market for the asset).Under GAAP (FAS 157), fair value is the amount at which the assetcould be bought or sold in a current transaction between willingparties, or transferred to an equivalent party, other than in aliquidation sale. This is used for assets whose carryingvalue is based on mark-to-market valuations;for assets carried at historicalcost, the fair value of the asset is not used. One example ofwhere fair value is an issue is a college kitchen with a cost of $2million which was built five years ago. If the owners wanted to puta fair value measurement on the kitchen it would be a subjectiveestimate because there is no active market for such items or itemssimilar to this one. In another example, if ABC Corporationpurchased a two-acre tract of land in 1980 for $1 million, then ahistorical-cost financial statement would still record the land at$1 million on ABC’s balance sheet. If XYZ purchased a similartwo-acre tract of land in 2005 for $2 million, then XYZ wouldreport an asset of $2 million on its balance sheet. Even if the twopieces of land were virtually identical, ABC would report an assetwith one-half the value of XYZ’s land; historical cost isunable to identify that the two items are similar. This problem iscompounded when numerous assets and liabilities are reported athistorical cost, leading to a balance sheet that may be greatlyundervalued. If, however, ABC and XYZ reported financialinformation using fair-value accounting, then both would report anasset of $2 million. The fair-valuebalance sheet provides information for investors who are interestedin the current value of assets and liabilities, not the historicalcost. All of the following are disadvatages of fair valueuse except: d)fair vaules can only be use on balancesheets