Return to site

Financial Reporting Standards

Financial statements that are presented that are International Financial Reporting Standards inspired use fair market value in the recording of financial statements. Fair market value has been defined in the related literature portion of this research. Fair market value is also defined as the amount that the seller is willing to offer to all parties interested in buying the seller’s products. And, fair market value is the bid price that the buyer is willing to pay in order possess a product.

This can be explained using the theory of supply and demand portion of the foundations of economics lessons. Economics explains that as the number of buyers or demand will decline as the purchase price of goods will increase. For, many customers would later realize that it is not worth paying so much money on a product that is unreasonably priced. The decline in the demand for the products would decline because the customers would now be enticed to buy from the other suppliers or even change their choice from their current product to an alternative but as effective one.

Likewise, the seller would increase their production of goods produced if the selling prices of their goods increase. A higher sales price would increase the company’s net profits. However, the seller cannot increase his or her selling price as high as he wants. For, the customer would not buy a product that is no very reasonable. Both the sellers and the buyers then meet in the middle in order to satisfy their need. The seller’s need to sell at a profit will be complied with if the buyer’s need to buy at a reasonable price is also beneficial to the buyer.

This agreed price is known as the equilibrium price. Another term for equilibrium price is the market price. One way of determining the fair market value of an asset stated in the company’s balance sheet is to find the current market price of the same product sold in the market. Another way of determining the fair market value is to use the past cost as basis when there is no current selling or buying activity to determine the fair market value of a product.

Statement of Financial Accounting Standards (IFRS) no. 107 shows the assets liabilities and shareholders equity should be reconstituted to their fair market values. Currently there is a trend to restate the balance sheet, income statement and statement of cash flows. In addition, Financial Accounting Standards Board (FASB) no. 1991 states that the fair market value is the proper way of presenting the financial statements. Likewise, Statement of Financial Accounting Standards (SFAS) no.

119 and FASB no 1994 emphasises that the business entity must prepare the derivatives using fair market values when preparing the balance sheet, income statement and statement of cash flows. The derivatives include trading in commodities futures as well as option contracts. The stock market in the United Kingdom is basically founded on the market value theory. This is the reason why the prices of shares of stocks in the Stock exchanges are very volatile to unmoving. On the other hand, one of the non -IFRS standard way of financial statement presentation is based on historical cost.

Historical cost could also include the fair market value of the asset, liability or shareholders’ equity when the asset was bought in the past. Historical cost can also be interpreted as the fair market value of the liability at the time that the liability had occurred in the past. Likewise, Historical cost is the fair market value of the stockholders’ equity transaction at the time that the shares of stocks were transacted in the past. However, fair market values could be lower or higher than the historical cost price.

 

Source: http://lawaspect.com

Historical cost could also include the fair market value of the asset, liability or shareholders’ equity when the asset was bought in the past. Historical cost can also be interpreted as the fair market value of the liability at the time that the liability had occurred in the past. Likewise, Historical cost is the fair market value of the stockholders’ equity transaction at the time that the shares of stocks were transacted in the past. However, fair market values could be lower or higher than the historical cost price.

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OKSubscriptions powered by Strikingly