SFAS No. 157

SFAS No 157 - FAIR VALUE MEASUREMENT ZEYNEP K KARACA SYNOPSIS This paper anaylzes the accounting effects of the proposed standard SFAS no 157 Fair

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ZEYNEP K. KARACA SYNOPSIS : This paper anaylzes the accounting effects of the proposed standard SFAS no. 157 Fair Value Measurement by FASB, and considers the advantages and disadvantages of using fair value measurement in accounting practice. I address the fact that financial report preparers, auditors and users of financial statements often have very different perceptions of fair value measurement than do regulators and accounting standard boards. Boards and regulators often see the practice of fair value measurement as the only way to go for both the transparency and relevance of financial information, meanwhile the preparers of financial statements believes that fair value measurement is eligible to risky valuation of the assests. Therefore, I analyzed and compared the current market and its requirements to the former, make inferences and draw conclusions in the means of advantages and disadvantages of fair value measurement and briefly explained each topic. INTRODUCTION The present definitions of valuation, historical cost approach, depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits and losses are able to be recognized. Accounting standard setters define fair value as the amount that would be paid or received for the item being valued in an arm’s length transaction between knowledgeable parties. This is a market value definition and the standard setters have indicated that, if available, a current market price for the item is said to be the best estimate of its fair value. In discussion papers on financial fair value, accounting standard setters have set reliability hierarchy for different fair value reporting methods. At the top of the hierarchy are observed market prices of the instruments being valued. At the bottom is the use of models when market prices are not available. The general assumption is that most often market prices will be available for the exact item or a close substitute. But, in current economic environment, fair value accounting faces challenging situations and significant opposition. For example, the vast majority of bank loans, are not traded and arm’s length market transactions prices generally will not be available. Thus for most loans reported fair values will contain some mixture of modeling and reliance on market prices. The amount of modeling and model assumptions may be significant where market prices are being used but fair value measurement of the value of financial instruments that do not have an active market is eligible to conflicts and confusions. Submitted: November 2009
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This note was uploaded on 10/25/2010 for the course ACCT 695 taught by Professor Duke during the Fall '10 term at Boise State.

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SFAS No 157 - FAIR VALUE MEASUREMENT ZEYNEP K KARACA SYNOPSIS This paper anaylzes the accounting effects of the proposed standard SFAS no 157 Fair

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