To:

Board of Directors

From: Hafiz Moman Tariq (Consulting Officer)

Date: 9th of March 2015
Title: Fair Value Accounting

The possible basis for valuing the assets is Fair value. According to RICS, Fair Value is defined
as the amount that would be received for exchanging of the assets or paid in transferring a
liability at arms length transaction between knowledgeable, willing participants
Fair Value is ascertain by some alternative ways but the best one to estimate is current market
value, alternative ways are put in practice in the absence of this way.

Unadjusted quoted prices in active markets for identical assets or liabilities that the entity

can access at the measurement date [IFRS 13:76].The most reliable evidence of fair value
Inputs other than quoted market prices included within Level 1 that are observable for the

asset or liability, either directly or indirectly. [IFRS13:81]

Inputs are unobservable inputs for the asset or liability. [IFRS 13:86]. Unobservable
inputs are used to measure fair value to the extent that relevant observable inputs are not
available.

A variety of measurement bases are used today in financial reporting, the bases considered here
are all forms of accrual accounting i.e. they are intended to measure income as it is earned and
costs as they are incurred, as opposed to simply recording cash flows.
Historical Cost
Current Cost or Deprival Value
Realizable Value
Value in Use
Fair Value is required by various accounting standards, Instantly IAS 19: Employee Benefits,
IAS 16: Property, Plant and Equipment, IAS 38: Intangible Assets, IAS 41: Agriculture and IFRS
9: Financial Instrument.

Main Part:

Pros of Fair Value:

Among the advantages of fair value is that it is a clear concept, the value that a business could
get by selling or settling the item now. It may, of course, not end up taking that course of action
but it should be recalled that the items stated at fair value are only those held for trading,
available for sale or that the entity chose to state at fair value.
Fair value is more information rich concept, given that it is a market-based value representing the
outcome of the views of all the market participants, not just of one such participant, namely the
reporting company.
The use of fair value to measure a good proportion of financial instruments in accounts is,
however, widely accepted. Financial reporting for listed companies is all about supplying the
needs of investors in capital markets.
Cons of Fair Value:

There are objections to fair value in principle. It is the value a business could have obtained from
selling an asset at the balance sheet date, but this is therefore a value that it chose NOT to sell at.
As fair value does not require a transaction to have occurred to recognize the change in value it
can recognize profits and losses earlier than would the historical cost approach. Fair value risks
overstating values and profits (leading to stronger balance sheets) when markets are rising but
equally has a tendency to overstate the declines in value (hence weaker balance sheets) on the
way down.
Probably the biggest problem with fair value is the widespread concern over the reliability of
values in illiquid markets. In short, as fair values move away from quoted prices in liquid
markets the problems of reliability of these values multiply.
Impact of Fair Value on Qualitative Characteristics of Financial Statement: