Fair Values in the Preparation of Financial Statements Essay

Fair Values in the Preparation of Financial Statements - Essay characterRelevant Information Information needs to be relevant to the needs of users in order to shell out its purpose. However, there are also other fundamental qualities that financial statements need to have. These qualities include comparability, faithful representation, consistency, completeness, understandability, and dependability (BPP 2009a). Information is useless if it is not unquestionable and in a number of cases, the think ofs described as ordinary values in the accounts do not provide a reliable estimate of the value of pluss and liabilities. According to Bath (n.d.) concerns also focus on this matter. It should also be noted the more reliable the information is the less relevant it will be. Relevant information has predictive value, feedback value, and timeliness. Reliable information is objective Comparability of financial statements Financial statements need to be comparable from one year to the n ext and between one company and another. However, even though decent values may be said to be current and therefore more comparable, the fact that understanding needs to be exercised brings subjectivity into play. In asset to that, those judgments on which investors and other stakeholders depend have their own agenda. In some cases, they may exercise their judgment in such a way as to manipulate the accounts. This, therefore, brings us back to the reliability of the figures in the financial statements. ... the International Financial Reporting Standards (IFRS) requires that the classification of financial instruments be recorded at fair value in a hierarchy consisting of three (3) levels. The first level (level 1) relates to quoted prices that have not been familiarized for identical assets and liabilities in active markets. The second level (level 2) relates to input prices but excludes quoted prices which are included in the first level and which can be observed directly for a ssets and liabilities, in the form of prices or in the form of derived prices indirectly. The third level relates to both assets and liabilities that are not based on market information that can be observed. IASB concluded that this would result in improvement for comparability purposes as well as assist in the convergence process of the IFRSs to the United States generally accepted accounting principles (GAAP). The basis that was given up for that conclusion relates to the disclosures required by IFRS 7 and ASC having no differences in terms of their application. Khalik (2008) in his paper entitle The case against fair value accounting indicated that its critics have suggested that in times of poor economic conditions fair value (FV) accounting leads to the generation of pessimistic assumptions that further result in significant reductions in asset values as well as major reductions in earnings because of the fact that unrealised losings are taken into account in the income state ment.