Discuss the benefits and drawback of fair value accounting measurement Assignment

Discuss the benefits and drawback of fair value accounting measurement vis--vis other measurements with respect to enhancing the quality of financial information - Assignment Example The accounting system demands an estimation of fair market value in order to demonstrate the present value of future cash flows (Penman, 2007). Many financial analysts are of the opinion that the fair value accounting has significantly contributed to the reasons behind financial crisis of 2008 (IMF, 2009). In this paper the statement will be critically evaluated to justify such argument. The paper will also analyse the benefits and drawbacks of fair value accounting in comparison with other measurements in order to enhance quality of financial information. Many critiques have argued that apart from the reasons such as subprime mortgage, excessive debt and default credit swaps that had mainly caused for financial crisis of 2008, fair value accounting which is also known as mark to market accounting has significantly contributed towards the crisis through producing deceptive data and defective financial statements (Laeven and Huizinga, 2009). However, though there has been much substantiation regarding asset fire sales and downward spirals in financial markets, supporting evidences that may prove the accounting system’s function in igniting the crisis are negligible. Such discussion can be based on the following myths. Some critiques have argued in favour of FVA that the assets reported under historical cost in the company’s balance sheet have no relation to their current value. The values of most of such assets are documented at their purchasing price with adjustments for depreciation (for building, plant and machineries etc.) or appreciation (bonds and other fixed maturity investments) of those assets (Bonaci, Matis and Strouhal, 2010). However, such valuation may not be appropriate in current market scenario. For example, value of a company owned building may hold more value in present market than its depreciated book value as calculated under historical cost. Hence, even under historical accounting, importance of fair value has been established