The recent financial crisis has led to a strong debate about the advantages and disadvantages of fair-value accounting

The recent financial crisis has led to a strong debate about the advantages and disadvantages of fair-value accounting. In particular, many critics have argued that fair-value accounting has significantly contributed to the financial crisis or, at least,. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required. It compares and contrasts the fair value accounting system with other measures like the historical cost accounting, replacement cost accounting and deprival value in the light of its contribution towards the occurrence or even increasing the severity of the recent financial crisis.

As per the definition of fair value accounting as stated in FASB, 2006, the related parties which engage in the transaction process are expected to be willing as well as knowledgeable. It classifies each of the assets and liabilities at three different levels. In the first level, which is the most reliable one, financial instruments have been measured by at market value for representation in the income statement and balance sheet. Fair value is not affected by the company specific factors and measure market based values. The observed market price is the most reliable reflection of fair value systems. Difficulties arise in case there is more than one such value available, the market is considered to be illiquid and there is not specific market item that can be measured.

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In level 2 measurements, financial instruments reflect the price quotes of similarly placed financial instruments in active as well as inactive markets. The characteristics involve fewer transactions, variations of price quotations and little availability of any public information. The inputs that are observable like the yield curves and the interest rates are observed at volatilities, credit risks and default rates. In level 3 measurement system, financial instruments that do not have any directly traded market like innovative derivative products and private placements are based on the mark to model valuation technique (Engelen, et. al., 2008. Bebchuk, Cohen and Spamann, 2009).Such unobservable inputs help in measurements under the fair value system to the extent to which it is there is little observable input available.

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