Fair Value Reporting And The Financial Crisis Essay

Fair Value Reporting And The Financial Crisis - Essay Example Fair value accounting is the unbiased and rational estimate of the market price of a service, an asset, or a product. The concept of fair value accounting takes into consideration factors such as the demand and supply, the distribution, production, the various costs of the products close substitutes, the utility produced at any given level of development, etc. These are referred to as the objective factors of fair value accounting. There are also some subjective factors of fair value accounting, and these factors include, the utility which is individually perceived, the risk characteristics, the return on, and cost of capital. It is important to understand that accountants use fair value reporting to depict the market value of a product or a liability, which in most cases; it is difficult to determine their market price. The FAS 157 defines fair value accounting as a value in which an asset can either be sold or bought in a current business transaction that involves willing parties. It is important to understand that fair value accounting is used for assets which have a carrying value that is based on the mark-to-market valuations. It is also important to understand that the fair value of an asset that has a historical cost is not always used. It is important to understand that the financial crisis began with the decline of the housing prices, and with an increase in the default rates. There was uncertainty in the financial market because of lack of accurate information from policy formulators.