Academic journal article European Research Studies

Property Assets Fair Value Accounting under Uncertainty

Academic journal article European Research Studies

Property Assets Fair Value Accounting under Uncertainty

Article excerpt

1. Introduction

According to microeconomics, property is defined as a good able to provide a constant flow of services, such as housing services or a source of cash inflow. Assets are consumer durable goods held either by households for housing needs, or by firms in order to install their business activities necessary to operate. As goods traded in the market, asset prices are defined through the law of demand and supply. In markets under equilibrium current values must reflect the assets' present values taking into account the time value of money. Any variation from the valuation under present values leaves space for moving from the equilibrium spot and the movement will continue till all current values reflect present values. Economics recognize the financial return of the asset by consumption or sale as a capital gain arising from the increase of the value of the asset. By establishing variable accounting treatments for assets, assets have developed into a prosperous investment tool for companies in order to obtain economic benefits, not only through consumption (own use) or sale, but also through investing.

In accounting and finance, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. It takes into account such objective factors as: acquisition/production/distribution costs, replacement costs, or costs of close substitutes; actual utility at a given level of development of social productive capability; supply vs. demand; and subjective factors such as risk characteristics; cost of and return on capital; individually perceived utility. In accounting, fair value is used as a certainty of the market value of an asset (or liability) for which a market price cannot be determined (usually because there is no established market for the asset). Under US GAAP (FAS 157), fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale.

The latest edition of International Valuation Standards (IVS 2007), clearly distinguishes between fair value, as defined in the IFRS, and market value, as defined in the IVS: So as the term is generally used, Fair Value can be clearly distinguished from Market Value. It requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction. Although Market Value may meet these criteria, this is not necessarily always the case. Fair Value is frequently used when undertaking due diligence in corporate transactions, where particular synergies between the two parties may mean that the price that is fair between them is higher than the price that might be obtainable on the wider market. On other words Special Value may be generated. Market Value requires this element of Special Value to be disregarded, but it forms part of the assessment of Fair Value.

Accounting fairness refers mostly to the fair presentation--and therefore, measurement or valuation--of an element recognized in the entity's financial statements. According to the Generally Accepted Accounting Principles across the countries, two basic asset valuation methods exist: the accounting of fair value and the accounting of historical cost. Fair value is used as a certainty of the market value of an asset for which a market price cannot be determined usually because there is no established market for the asset. Under US GAAP (FAS 157), fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale.

Historical cost states that each financial effect of a realized transaction stated in the firm's financial position shall be recorded at acquisition cost. Applying different accounting methods across firms or countries makes financial statements incomparable to each other. …

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