day 12 fair value accounting 2009 spring v3

day 12 fair value accounting 2009 spring v3 - Fair Value...

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Unformatted text preview: Fair Value Accounting Dr. James Gong Agenda Review of what we have learned so far Why fair value accounting? What’s fair value and fair value accounting? Group exercise: Fair value accounting in topics we have covered History of fair value accounting Group discussion: fair value accounting and financial crisis Practice problem: fair value accounting of a simple revenue recognition problem Future of fair value accounting Mid-term exam feedback Review Objectives of accounting Characteristics of useful accounting information Measurement method Phenomena and attributes in accounting Estimation Relevant metrics Assets Historical cost vs. fair value Trade off between relevance (for valuation vs. feedback value) and faithful representation Higher relevance Increase the consistency and comparability of fair value measurements Eliminate accounting arbitrage Consistency with IFRS Consistency with what FASB has done with regard to financial instruments and certain financial assets and liabilities Potential Advantages Potential Disadvantages Difficulty in measuring fair value Greater use of estimation Reliance on subjective estimation Volatility in earnings Cost of measuring and auditing fair value Unintended or unexpected consequences Credit quality declines => fair value declines => gains Banks’ positions look worse and worse in the downward market “an estimate of the price that could be received for an asset or paid to settle a liability in a current transaction between marketplace participants in the reference market for the asset and liability.” (FASB) “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.” (IASB) What Is Fair Value (1) Short working definition The market value, if a sufficiently active market exists, OR An estimated market value, otherwise Estimated market value is present value of future expected cash flows, adjusted for: Risk Market imperfections “Similar factors if market-based information is available to estimate those adjustments” What Is Fair Value (2) Need not be based on an actual transaction No requirement that a market exists Current transaction => fair value measurement is not intended to capture the most likely settlement amount Example : An arrangement will settle for 100 with probability .30 and for 0 with probability .70. The most likely settlement amount is 0. A current transaction would reflect the dispersion of outcomes: .30 x 100 + .70 x 0 => 30....
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This note was uploaded on 11/08/2011 for the course ACCY 301 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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day 12 fair value accounting 2009 spring v3 - Fair Value...

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