The following is the prompt we were given with the instructions under it:
‘A concern about fair value accounting is that profit or loss in a world with extensive fair value accounting would lack meaning’. (Barth, 2018).
Required: Critique and evaluate the statement immediately above. In so doing, you must discuss four (4) different
areas of concern to illustrate your answer. You should evidence knowledge gained throughout your studies,
predominantly from this module, but also knowledge gained from other academic sources and research.
You should use no more than 1,500 words in total for your answer. You may use fewer words if you wish to.
The quote above that we need to analyse comes from Source 2 PDF
Please could you read this article and use it as one of your references. Similarly I have attached Source 1 PDF, please read through that too and see if you can use anything useful from it. You can use any reputable academic sources in financial accounting/ fair value accounting.
these are ideas for the four different areas of concern:
1. Estimation Errors and Subjectivity: Fair value accounting often relies on estimated values when market prices are unavailable. These estimations can introduce subjectivity and potential bias, leading to reduced reliability and opportunities for manipulation. (source 1 can also be used here!)
2. Volatility and Predictability: The reliance on fair value accounting can result in volatile profit or loss figures due to market fluctuations. This volatility may reduce the perceived stability and predictability of earnings, which are often valued by investors.
3. The inherent flexibility in determining fair values creates opportunities for earnings management. This can lead to concerns about the accuracy of reported profits and the potential misrepresentation of a company’s financial position. (here is where you can bring in Source 1 article!)
4. Complexity and Investor Understanding: Fair value accounting increases the complexity of financial statements. This can make it more challenging for investors and stakeholders to fully understand and interpret financial reports, especially when they are not well-versed in accounting nuances. (ALTHOUGH IM NOT SURE ABOUT THIS ONE-if you have a better more evidence based idea please replace it!!)
And the end it, could you include benefits of fair value accounting, such as its relevance and decision-usefulness, to provide a balanced view.?
and as a conclusion, Summarize the evaluation and provide your opinion on whether the statement holds true based on the analysis. you can agree or disagree, just whichever you think is better to argue for.
Please use any other sources you would like. thank you so much
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