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Fair Value Accounting for USA GAAP financial statement

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Should Fair Value Accounting be required in the preparation of US GAAP financial statement? Included in your response should be a discussion of the definition of fair value accounting and the benefits and the disadvantages of the use of fair value accounting. Finally, you are required to draw a conclusion by answering the stated question. The conclusion will be based on the discussion contained in the memo.

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Should Fair Value Accounting be required in the preparation of US GAAP financial statement? Included in your response should be a discussion of the definition of fair value accounting and the benefits and the disadvantages of the use of fair value accounting. Finally, you are required to draw a conclusion by answering the stated question. The conclusion will be based on the discussion contained in the memo.

To: Tam Simpson:
From: Joan Smith, Chief Accountant;
Date: October 18, 2010
Subject: Fair Value Accounting:

The purpose of this memo is to answer the question: "Should Fair Value Accounting be required in the preparation of the US GAAP Financial Statements". In the answering of this question, the memo will lay down definitions, benefits, and disadvantages.

The context in which Fair Value Accounting should be considered is one in which the markets are volatile and investors, and other stakeholders are eager to find out what an asset is worth today. In this context it is believed that fair value accounting provides a level of transparency that is superior to that provided by historical cost based measurements(2).

According to the SEC the fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. This is the definition accepted under the GAAP. Willing parties means that transaction does not take place for the liquidation of the firm. Similarly the fair value of a liability is the amount at which the liability could be incurred or settled in a current transaction between willing parties. The current fair value is taken to be a quoted market price in an active market. On the other hand if the quoted market price is not found, an estimate of the Fair Value should be made using the best information available in the circumstances. Essentially what this means is that fair value is the approximation of the price that a firm would realize if it sold an asset or the cost it would incur to repay a liability. In this manner stocks that are traded on an exchange debt securities, and derivatives can be measured and reported at fair value. Fair Value is defined as the market value of the asset or liability for which market price can be determined. It is the amount at which the ...

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