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Ask Lane Your Own Question
Category: Finance
Satisfied Customers: 12020
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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If a client comes to me and asks me to provide them the benefits

Customer Question

If a client comes to me and asks me to provide them the benefits of fair value accounting - say with their bond payables and the costs, what would I tell them? Also including the benefits as interest rates fluctuate up and down.
Submitted: 2 years ago.
Category: Finance
Expert:  Lane replied 2 years ago.
Hi,In terms of a pur FINANCIAL benefit, it may or may not help, depending on the specifics of the situation..First of all, a benefit is going to be that they will be compliant with what's becoming expected from public firms (and private firms seeking investment) in audits, and generally ... that reason for THAT being accuracy; (accurate asset and liability valuation on an ongoing basis to users of a company’s reported financial information..When the price of an asset or liability has increased or is expected to increase, the company marks up the value of the asset or liability to its current market price to reflect what it would receive if it sold the asset or would have to pay to relieve itself from the liability. By the same token, the company marks down the value of an asset or liability to reflect any decrease in the market price..One effect of that MIIGHT be considered a Dis-advantage; Fair value accounting limits a company’s ability to potentially manipulate its reported net income. Sometimes management may purposely arrange certain asset sales, for example, to use gains or losses from the sales to increase or decrease net income as reported at its desired time. Fair-Value takes this off the table, by reporting these value changes in the period they occur..TO your question, if we're talking about bonds, then we need to report that inverse relationship between rates and prices (value) AS the interest ratesd fluctuate (Duration being the way to measure that). Rates go up? Why would an investor pay me the 1000 par value for a bond with a coupon at 4% when rates have gone up to 5%? The inverse relationship would be reflected in the period we SEE the rate change... so, to state the obvious , when rates hae gone down any my bond would sell in the market at a premium, fair-value accounting will show that CURRENTLY..A big diisadvantage for smaller companies, especially small company's have a responsibility to report anyway (loan or bond covenants' etc. - on TOP of the problem of vauing assets more often) ... Fair value accouunting can cause what some have callled "Value Reversal;" Market conditions where certain assets and liabilities are traded, may fluctuate often (even become volatile at times. Applying fair value accounting, companies reevaluate the current value of certain assets and liabilities even in volatile), potentially creating large swings in the value of those assets and liabilities. Then, as markets stabilize, the value changes reverse back to their previous normal levels, making any reported losses or gains temporary, which means fair value accounting may have provided misleading information at the time..THAT, then can lead to actually AFFECTING whatever markets may be involved here in a negative way, especially in an already down market. As an example, after an asset has been revalued downward because of drops in the current market trading prices, the lower value of the asset could trigger greater selling of the asset at a potentially even more depressed price..Let me know if this is what you'e looking for....Lane
Expert:  Lane replied 2 years ago.
… just checking back in to see how things are going.
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Customer: replied 2 years ago.
Expert:  Lane replied 2 years ago.
That's great..Given that, I would really appreciat your using the stars on your screen to rate me positively..Otherwise JA will not credit me for the work here..Gald it was helpful.Thanks,Lane