Strong debate about the advantages and disadvantages of fair-value Assignment

Strong debate about the advantages and disadvantages of fair-value accounting - Assignment Example These are the estimates that they would get if they were to sell the financial instruments in this case assets and liabilities. The companies report profits or losses when the value of their assets increase or their liabilities decreases. The losses decrease the value of the net income and hence the reported equity also reduces. Fair values have played a crucial role in United States for more than half a century. The standards of accounting that allow or otherwise require fair value reporting have increased in a big way over the recent years. In 2006, a controversial and important new standard of accounting was announced by the Financial Accounting Standards Board (FASB) no. 157, which provides a more detailed guidance in assisting firms in the use of fair values. The applicability of this has in recent years been put into test by market conditions which were extreme. Fair value was used as early as the late nineteenth century where it was common for organizations to use appraised values in quantifying their capital assets. In other words it was the value that would be realized by their sale in the market. This exit value was also believed by the economists, to be the most appropriate in construction of financial statements. (See, among others, Diewert, 2005). However, the abuse of this accounting standard by managers eventually led to the enactment of more accounting standards that were more formal by the accounting profession. This led to the emergence of historical cost as the dominant standard for reporting the financial instruments; assets and liabilities. Despite this, fair value remained a preferred concept by many theorists in the field (Magnan, 2009, p. 191). For example, Staubus (1961) and Sterling (1970) argue in support of fair values in financial reporting (p 192), which is the realizable value of the financial instrument. The exit value in accounting was used as a default option when accounting for some assets, however, it re-entered the