Accounting standards

Introduction

This paper examines the fair value disclosure in light of the two standards. This investigates the issue by addressing the question of whether the value disclosure done according to the requirements of the standards have an incremental association with a market value over and above information disclosed in bank’s financial statements. This will involve looking at a bank’s financial information. The financial institution is more suitable since it is dominated by various types of instruments under the SFAS 7 that allow the fair value for financial instruments to be more pronounced.

FAS 107

The FAS 107 extends existing fair value disclosure practices for various instruments by requiring all entities to disclose the fair value assets and liabilities whether recognized or not recognized in the statement of financial position. The financial instruments must be capable of being practically estimated for fair value. When the estimation of fair value is not practicable, FAS 107 requires disclosure of descriptive information relevant to estimating the value of the financial instrument. Thus, disclosures are not required for particular financial instruments in paragraph 8. (FASB, 2010)

However, it is difficult for financial institutions to set a fair value for loans due to their unique and lending terms. The valuation of loans would only be easy in a perfect market where the value would be equal to the future discounted cash flows. However, markets are not perfect for these financial instruments. There lacks a market value for such instruments which leaves much room for errors and managerial manipulation. Bearing in mind that they form the largest asset class of the bank’s financial statement and a driver of the bank’s profit, the value of loan is vital for the assessment of the banking system’s resilience. Under this standard, potential loan loss should be recognized only when there is a probable loss. This reduces the disclosures reliability. The standard also result in a lesser amount of relevant information seeing that loans are required to be reported at fair value while much of the information reported for loans is retained. Additionally, the fair value provided under this standard is incomplete as they omit intangible assets that represent the present value of expected future rent. (Elizabeth et al. 1996)

SFAS 157

The Statement of Financial Accounting Standards No. 157 sets up a single definition of fair value, expands the disclosures about fair value measurements and establishes the framework for measuring fair value under GAAP. The standard applies whenever other accounting standards require assets and liabilities to be measured at fair value but does not require additional fair value measures to be included in the financial statements. (FASB, 2010)

However, fair value measurements that require the recognition of unrealized holding gains and losses may lead to the distortion of net income. This exposes the fair value measurement to manipulation. This also leads to breaking the historical cost model. Further, the GAAP model requires reporting entities to make both historical-cost-based and fair-value-based disclosures. This raises the question whether fair value disclosures have value relevance over historical cost model which is seen as well working and understood. Additionally, the required revaluation of all assets allows managers to record income before getting the reliable evidence that it has been earned. It carries the risk of misleading based on expectations that may turn out to be false. Although SFAS 107 and SFAS 127 have made the financial statement a more comprehensive source of value-relevant information; it is clear from the analysis that fair value disclosures provide less relevant information. (Elizabeth et al. 1996)

References

Elizabeth A. Eccher a, K. Ramesh 'b, S. Ramu Thiagarajan (1996) Fair value disclosures by banks Journal of Economics and Accounting 22 (1996) 79 117

FASB (2010) Superseded standards

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in best nursing essay writers. If you need a similar paper you can place your order from custom nursing papers.