Saturday, June 26, 2010

What is Fair Value Accounting?

What is fair value accounting and how is it related to the accounting for trading securities?

In accounting we have to rationalize relevance and reliability, as outlined in the FASB's conceptual framework. In financial reporting this means fair value vs. historical costs. On many physical assets, GAAP is recording at historical costs. However, on trading securities and many intangible assets, its irrelevant to record them at historical costs.

Companies follow a fair value hierarchy, when reporting costs. There are three levels, based on reliability.

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