Question

1. Review these two articles on the Advantages and Disadvantages of Fair Value Accounting and Fixed Asset Impairment as well as other resources on the topic that you locate.
2. Answer the following questions:
   1. In your opinion, why do you think we don't use fair value accounting for fixed assets?
   2. Do you think that fixed asset impairment approximates fair value accounting for fixed assets? Why or why not? Are there any key differences?
   3. Based on the advantages and disadvantages of fair value accounting, would you recommend that fair value accounting be adopted for reporting fixed assets? Why or why not?

Fair value accounting is used to report asset valuations for many assets on the balance sheet but not fixed assets, at least not yet. Instead we employ asset impairment to test fixed assets, intangibles and natural resources to determine if the underlying value of the asset is expected to be less than the carrying value. But is this really the same as reporting fair value?

Answer 1

1.

• Fair Value Accounting approach is generally used to value the assets and liabilities to its market value so that the financial position of the company reflects true and fair picture. Fair Value Accounting should be used for assets and liabilities which are highly volatile in nature or the assets and liabilities which are to be disposed off in near future i.e. current in nature.
• Fixed Assets are resources which are used in the production of currents assets whose use are always more than one year and economic benefits will flow to the company.
• And there is a specific standard provided by the board for valuation of Fixed Assets and also for its impairment. And it’s an obvious rule if the specific standards are provided than the general standards cannot override it.

Thus, we should not use fair value accounting for fixed assets.

2.

• Partially agree with the statement.
• Impairment are done at the year end in which the company test whether there is permanent reduction/Significant Decline in the value of asset or not. So if the value of the asset has a permanent reduction we would have impaired the fixed asset and valued at Higher of Value in use or Fair value less cost to sell which approximates with the value of fair value accounting.
• But if there is Fair Value of the asset is increased than the impairment will not provide any upward valuation. But as per Fair accounting Principle, the fixed asset value need to be increased which in this case does not approximate the book value of the fixed asset.
• Key Differences can be that Impairment will only be provided when there is a permanent reduction/Significant Decline while in fair value accounting any changes in value of asset will be provided.

3.

• Yes, I would recommend that fair value accounting be adopted for reporting of fixed assets.
• Reason Being it would cover both the aspect of reporting in Increase or Decrease in valuation of fixed assets and will give a more clear picture on the financials of the company.
• Another Reason Being the volatility and fluctuations in fixed assets are comparatively lower and such assets are also not subject to any market risk which nullify the disadvantages of Fair Value Accounting.