Answers and Solutions

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FAIR VALUE OF ACCOUNTING IS THE VALUE WHERE BOTH THE SELLER AND BUYER BENEFIT FROM THE TRANSACTIONS.FOR EXAMPLE.IF THE SELLER SELLS A HOUSE FOR RS.50LACS THEREBY GAINING A PROFIT OF RS.5LACS AND THE PURCHASER PURCHASE IT  AND RESELL THE SAME AT RS.60LACS THEN HE  GAINS TO THE EXTENT OF RS.10LACS.IN ACCOUNTING THE SELLER WILL DEBIT BANK A/C FOR RS.50 LACS CREDIT PROFIT AND LOSS A/C FOR RS 5LACS AND CREDIT BUILDING A/C FOR RS.45LACS.SIMILARLY THE PURCHASE WILL DEBIT BUILDING A/C WITH RS.50LACS AND CREDIT BANK A/C WITH RS.50 LACS.AT THE TIME OF PURCHASE AND DEBIT BANK A/C WITH RS.60LACS CREDIT PROFI AND LOSS A/C WITH RS.10LACS AND CREDIT BUILDING A/C WITH RS.50LACS AT THE TIME OF SALE.

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'Fair Value Accounting'- Lets understand this through example-

Mr. X was in need of money, so he sold his building to us worth Rs 15 lacs for Rs 14 lacs. Now, the building costed us Rs 14 lacs, so in general, we book the building into accounts at Rs 14 lacs. However, under Fair Value Accounting, the value of building shall be written as Rs 15 lacs.

In this case, we will debite Building A/c by Rs 15 lacs and credit Bank A/c by Rs 14 lacs. Now the question arises of Rs 1 lacs, which is the difference. We will transfer the same to Profit & Loss Account. The reason for such is that we received a building worth Rs 15 lacs at Rs 14 lacs. Hence, we had a profit of Rs 1 lacs, which need to shown in account, for 'true and fair view'. 

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Fair value accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing basis certain assets and liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities.

Under fair value accounting, companies report losses when the fair values of their assets decrease or liabilities increase. Those losses reduce companies’ reported equity and may also reduce companies’ reported net income.

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Under the fair value measurement approach, assets and liabilities are re-measured periodically to reflect changes in their value, with the resulting change impacting either net income or other comprehensive income for the period. The result is a balance sheet that better reflects the current value of assets and liabilities.

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Fair Value (FV) is an accounting term, originally defined by the SEC. Under GAAP, the FV of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, other than in a liquidation.

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Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. 

Following points are to be noted:

- Knowledgeable and Willing parties ( Parties to a transaction are completely aware of the underlying transaction)

- Arms length transaction (Transaction is not between related parties)

- Fair value of an asset is the amount at which it could be bought or sold in an arms length transaction between knowledgeable & willing parties.

- Fair value of a liability is the amount at which it could be inc or sold in an arms length transaction between knowledgeable & willing parties.

Fair value measurement provides more transparency than historical cost based measurements.

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Fair value accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing basis certain assets and liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities.

Under fair value accounting, companies report losses when the fair values of their assets decrease or liabilities increase. Those losses reduce companies’ reported equity and may also reduce companies’ reported net income.

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In accounting and economics, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. It takes into account such objective factors as: acquisition/production/distribution costs, replacement costs, or costs of close substitutes.