Essays on Asset Revaluation and Earnings Management - Pros and Cons, Advantages and Disadvantages of Fair Value Case Study

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The paper “ Asset Revaluation and Earnings Management - Pros and Cons, Advantages and Disadvantages of Fair Value”   is an actual example of a case study on finance & accounting. With the revaluation model, the non-current assets are carried at cost at its revalued total amount. This is its fair value on the revaluation date less accumulated subsequent depreciation and impairment losses on condition that fair value is reliably measured. Whereas under the cost model the non-current asset is carried at net book value and accumulated impairment s. Under the revaluation model approach, the continuous revaluing of non-current assets at regular intervals is necessary to confirm that the carrying amount will not vary from the fair value.

Companies use the financial approach of fair value accounting in measuring and reporting the amount of money they can receive if the assets are sold and if relieved from all financial liabilities. Pros and cons of fair valueUsing fair value, businesses obtain and report the worth of various assets and liabilities based on the existing or estimated market prices which are fair. Variations in asset or liability prices over a certain period of time can generate unexpected gains or losses for assets that are held and liabilities which are outstanding and this may consequently increase or reduce the net income, and affect the balance sheet equity.

Fair value accounting has been a topic of debate and has supporters as well as critics. It has both its advantages and disadvantages as has been extensively discussed; Advantages of fair valueIt gives the correct valuation. Fair value accounting is more accurate when finding the current valuations of assets and liabilities.

When there is an expected increase or decrease in prices, the valuation can respond the same way. If sales are done, there will be no discrepancies to be charted in case there is a difference between the valuation and the transaction. Businesses can realize where they stand to depend on current market prices. It is a measure of true income. Using the fair value accounting approach there are fewer chances of manipulating the accounting data. The price variations are tracked on the basis of exact or estimated value but not by use of assets sale to influence gains or losses.

Income change is a result of changes in the asset value and it is reflected in the final income.    

References

Stefan and Professor, K .2013.Is fair value accounting really fair? A discussion of pros and cons with fair value measurement.Finland: Finance and accounting journal.

Benston, G.J. 2006.Fair value accounting: A cautionary tale from Enron: United States: Goizueta Business School, Emory University Atlanta, GA 30322.

Black, E.L., Sellers, K.F., and Manly, T.S. 1998.Earnings management using asset sales: An international study of countries allowing non-current asset revaluation. Journal of Business Finance Business and Accounting.

Hu, Fang, Percy, Merjella, and Yao, D.2015. Asset revaluations and Earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

Nicola Moscariello.2012.Fair Value Disclosure, External Appraisers, and the

Reliability of Fair Value Measurements: Journal of Modern Accounting and Auditing, University of Naples II, Italy.

Whalen, R. Christopher. 2008.The Subprime Crisis Causes, Effect, and Consequences: Networks Financial Institute Policy Brief No. 2008.

Laux and Leuz, C.2010. Did Fair -Value Accounting Contribute to the Financial Crisis?: Forthcoming in the Journal of Economic Perspectives 2010

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