What is Fair Value Accounting?

Difference Between Historical Cost Accounting and Fair Value Accounting

Fair Value Accounting is an accounting standard that requires companies to measure and report their assets and liabilities at their current market value. In other words, it reflects the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The application of fair value accounting requires careful consideration of market conditions and diligent adherence to accounting standards and best practices. It is important to note that fair value accounting is not without its criticisms. Some argue that it can exacerbate market swings and lead to potential over-valuation or under-valuation of assets and liabilities.

Key takeaways from Fair Value Accounting:

Fair Value Accounting values assets and liabilities at their current market prices, providing a more accurate representation of their real-time worth.
Fair value accounting is more responsive to market fluctuations.

Difference between Historical Cost Accounting and Fair Value Accounting

Valuation of assets and liabilities is an important aspect of accounting to prepare financial statements. The two basic methods of accounting are Historical Cost Accounting and Fair Value Accounting. Historical Cost Accounting emphasises recording assets and liabilities at their initial acquisition or incurrence cost, whereas Fair Value Accounting values assets and liabilities at their current market prices.