Advanced Accounting Theory and Practice Essay Example | Topics and Well Written Essays - 750 words

Advanced Accounting Theory and Practice - Essay Example The use of fair values in accounting for financial instruments to provide information to users of financial statements has been tested by cases of extreme market conditions. Fair value accounting has had a fair share of praises and criticisms. This assignment aims at explaining some potential criticisms, and evaluating whether they are correct and where they are overstated. The main objective of this assignment is; to illustrate whether users of financial statements are advocates of fair value accounting. Fair value measurement aims at estimating, as best as possible, the prices of financial instruments and how these instruments would change hands in orderly transactions based on current conditions and information. To achieve this goal, firms incorporate current information about their future cash flows, and current risk-adjusted discount rates into their fair value measurements. The standard requires firms to use available market prices for similar positions to estimate fair values. This requirement relies on the fact that, market prices should replicate all publicly available information about future cash flows as well as current risk-adjusted discount rates. In some cases where market prices for similar positions are unavailable, firms estimate fair values using relevant valuation models. These models are applied using observable market inputs; interest rates and yield curves, and unobservable firm-supplied inputs; expected cash flows from the firm’s own data. Fair values e stimated using valuation models are referred to as mark-to-model values, whereas those estimated using unadjusted or adjusted market prices are referred to as mark-to-market values (Wallison, 2009). Firms report the fair values of the positions they currently hold on their financial statements. This standard also requires firms to report on periodic changes in the fair value of their current position. These periodic changes are indicated as unrealized gains and losses