Financial Accounting Standard seven (FAS 7) guides entities in determining the fair value estimates for the financial statement needs. This is a general rule that is applied worldwide so that figures appearing in statements may make sense to all stakeholders. Such unbiased figures will be of use incase local companies want to trade internationally, because uniformity in cost or value measurements are made uniform.
Financial Accounting Standard one hundred and fifty seven (FAS 157), is applicable to either financial or non financial assets or liabilities being measured fairly as per authorities on accounting pronouncements. The absence of a particular consistent framework in fair value estimates for quoted prices can create inconsistencies or incomparability. The Financial accounting Standards framework does away with inconsistencies on the balance sheet figures as per historical cost and income statement figures.
According to Financial Accounting Standard one hundred and fifty seven (FAS 157), fair value is the price received when selling an asset and the amount paid in transferring a liability in a transaction that is taking place on active markets. This price may also be called the exit value. Such prices are determined by both financial and economic factors and operate at free will, while holding other factors constant.
It can also be determined by considering that all participating parties are acting at free will and are competing for the few available resources. Fair value in future markets is an equivalent amount in future contracts. This will be an equivalent of the spot price just after you have considered compounded interest or lost dividends due to the fact that investors own future contracts but not physical stocks for a particular time period. A liability’s fair value is the sum for incurring the liability or selling it on any current transaction.
(Brian, 2007 p.35-45)
FAS 157 stress using market input when making an estimation of an asset’s or liability’s fair value. Prices that are quoted, data for credits and curves for yields are instances for market inputs under FAS157. Quoted prices may measure fair value most accurately but due to the non existence of active markets other techniques may be used in estimating asset’s or liability’s fair value. Under FAS157 assumptions applied in estimating fair value may be from a non related market participant’s perspective. It will therefore be necessary to identify the market for trading an asset or liability.
(Brian, 2008 p.46-52).
Incase of the availability of more than one market, FAS 157 expects the ‘much advantageous market’ to be used. Prices and costs for transacting should be considered when estimating the much advantageous market. It can therefore be concluded that fair value accounting is the greatest relevant estimate in financial instruments. Fair value accounting should be retained in financial accounting, because it ensures a true and unbiased view of the financial statements. Financial statements will be a clean representation of an entity’s financial and economic position to all stakeholders who might be interested in the performance of any publically traded company.
AICPA. (2010). Fair value Accounting @http://www.aicpa.org/MediaCenter/fva_faq.htm Retrieved
On May 4 2010
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