Write a 2- to 4-page paper analyzing the impact of fair value measurements on ac

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Write a 2- to 4-page paper analyzing the impact of fair value measurements on accounting practices. Research the development of fair value accounting rules and guidelines. Consider issues surrounding fair value accounting. Explain the impact of rules and guidelines surrounding fair value measurements on a particular industry (use the industry that you choose for your Discussion question) and how they might influence how a company manages its assets. Finally, analyze the pressures managers and auditors face to report favorably on a company's assets and the ethics at work in their role.

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Analyzing the impact of fair value measurements on accounting practices

            The concept of fair value measurements is to allow organizations to estimate the optimal price for assets which they currently hold based on current conditions and information (Ryan, 2008). With the use of fair value measurements organizations report the fair value for the positions that they currently have on their balance sheet. The impact of this is that it can have the organization experience unrealized gains or losses from the items held on their balance, as a result of fair value. The main impact and issue with fair value is the ability for organizations to estimate the so called fair values correctly without having discretion in their estimates. According to Ryan (2008), “Fair values typically are less accurate and more discretionary when they are either adjusted mark-to-market values or mark-to-model values. In adjusting mark-to-market values, firms may have to make adjustments for market illiquidity or for the dissimilarity of the position being fair valued from the position for which the market price is observed” (p.4). The impact that this has on the account practices is the validity and reliability of what the organization claims to be fair value, thus this can lead to ethical or unethical practices being taken under the accounting practices of the organization.

Development of fair value accounting rules and guidelines

            According to FASB (2010) the fair value rules and guidelines would include that the measurements be made on the assumptions of the market participants to be used in the pricing of both assets and liabilities. The rules and guidelines contain three facets based on hierarchy, including, market participant assumptions are developed base on market data obtained from independent sources of the organization, the reporting of the organization’s own assumption about the market participants are developed based on the best information under the current circumstances, and finally the organizations must not ignore any information in relation to the participant assumptions that is readily available, without undue effort and cost. These are the most recent rules in fair value account and they offer a single definition along with the framework needed to report fair value. The development of fair value is to ensure that the assets and liabilities that are reported on a firm’s balance sheet offer the most accurate reporting possible.

Consider issues surrounding fair value accounting

            The issues surround fair value accounting is to question whether or not it actually provides more helpful and useful information to all market participants, opposed to other alternate methods of account, including amortized cost accounting (Ryan, 2008). The issue with this is that is reduces the organizations incentive for disclosures that are voluntary. Furthermore doe fair value accounting help organizations deal better when markets are illiquid or disorderly. It does in times help to creating quality information during these times, but requires the reporting based only on the fair value method.

Influence how a company manages its asset

            When organizations use the fair value method of accounting the assets are reported at fair value, opposed to historical value for the assets. Depending on the current market conditions organizations may be reported less or more from one period or another based on market rate fluctuations of the assets worth. The reporting of assets specifically for assets or liabilities that are held for maturing are often under or over reported based on the market conditions, despite the fact that they made be held to maturity, thus resulting in historical cost accounting being a better method (Donker, 2015). Companies must be able to manage the amount of these assets or liabilities so they don’t paint a false picture of the firm’s performace.

Pressures managers and auditors face to report favorably on a company's assets and the ethics at work in their role.

            The pressures that managers face would include the proper reporting and estimation of the assets and liabilities reported on the balance sheet. Some managers may have goals tied to performance, and since fair value represents an estimation it can allow for unethical reporting to occur. Managers and purposely understate or overstate the value of the assets and liabilities as a way to increase and decrease unrealized gains and losses from one period to another. From the Auditors perspective the value of the assets and liabilities is based on an estimation, and is sometimes difficult to disprove. This may influence an auditor to overlook the fair value of the assets and liabilities, even at times where speculation can be doubted. The ethical considerations of the auditor would be to try and determine when and how unethical reporting is occurring in a firm, which at times can be difficult.

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