FINANCIAL REPORTING AND APPLICATIONS

Financial Reporting and Applications



Financial Reporting and Applications

Introduction

Fair value is the value sufficient to acquire the asset or settlement of liabilities in a current transaction between the willing and the knowledgeable parties, independent of each other parties. In order to transaction prices could serve as a fair value information about them should be made available publicly. The definition of fair value is one of its most authoritative sources in the international accounting standards IAS / IFRS, which describes it the sum for which an asset could be replaced or a liability settled, between knowledgeable, willing parties in a transaction between independent third parties Fair value accounting needs assets to be revalued when fair value is differing from the current book value. An asset requires to be revalued when the securities' market value changes or their price of purchase may not independent from a larger transaction as it occurs in an acquisition. The intangible assets value like goodwill has an important effect on reporting profits and on balance sheet. The common omission of goodwill for valuing purposes makes this least significant for investors. But after primary recognition of goodwill, it should be tested annually for impairment. Market methods and income methods are two methods that are used for the valuation of intangible assets. According to the IFRSs there are. Fair value can be used in accounting for estimating market value of an asset or liability for which the price of market cannot be determined because there is usually no market for the asset which is established. It is used for the assets having the value which is based on the valuation of mark to market, fair value of assets not used for the assets which are carried at historical cost, For example the fair value of the college kitchen at a cost of $ 2 million that was built 5 years ago. If the owners desire to put a fair value in the kitchen would be subjective in nature because there is no active market for such items.

Calculation of fair value To calculate the fair or a target share price discounted cash flow method (DCF) is being used. DCF method is the calculation of the company's cash flow from future industrial and economic activity. The company's activities are usually projected at 12.5 years. This method allows determining the free cash flows available to shareholders of the company, which makes it possible to calculate the fair price of the shares. The weakness of the income approach is that because of the large number of parameters estimated probability of error is increasing. Therefore we should not blindly trust a fair price that publishes investment companies. Consensus is the average value of fair prices (goals), calculated by investment companies and banks of the instrument. The calculation is as follows: where: Pk - the consensus target; Pi - the i is the goal of the investment company or bank for a security; n - number of goals set by the ...