Fair value accounting attempts to make financial information more relevant to financial statement users, at the risk of greater subjectivity. What factors would you examine to evaluate the reliability of fair valued assets?
There are several factors that one should consider when evaluating the reliability of a firm's fair valued assets:
• What assumptions is the firm making in valuing its assets? Are there details in the footnotes of the financial statements that can be examined for reasonableness?
• In considering the firm's assumptions for valuing its assets, what proportion of its fair valued assets are considered Level 1, 2 or 3 assets? Is this proportion reasonable? How does it compare to other firms in its industry?
• Does the firm have a track record of taking write-downs on the fair value of its assets? This suggests a history of overvaluing assets.
• Is the firm consistently earning less than the cost of its capital? In theory, if a firm's assets were all truly at fair value, and all assets were included, a firm would only be able to earn its cost of capital. So if a firm is consistently earning less than its cost of capital, its reported assets are likely to be overvalued.
• Look for market insight – a firm with a price to book ratio of less than 1 (quite common in the insurance industry at this writing) suggests that the market believes a firm's assets are overvalued.
You might also like to view...
The statement of cash flows categorizes all cash flow into four major types of activities: planning, investing, financing, and operating
a. True b. False Indicate whether the statement is true or false
Which is an example of an open-ended question?
a. “Tell me about your ideal career.” b. “How many employees did you manage at your last job?” c. “Did you read the job description carefully?” d. “Did you do training and development at your last job?”
Which of the following categories of expenses is subject to immediate recognition on the income statement?
a. Repairs and maintenance expense incurred on production equipment of a manufacturer b. The salary of the company president c. The salary of the production foreman d. Utilities expense for the production line of a manufacturer
"I haven't missed a day of work in the past year, and I'm committed to this company, so I determined that a 20 percent salary increase is warranted for reasons of fairness," said Ted to his supervisor. In reply, Liz asked, "How did you determine that a 20 percent salary increase is fair?" If Ted had used equity theory as a basis for his request, he would have replied, "To determine a proper salary increase,
A. I made comparisons with others' salaries." B. I sought job enlargement in my position." C. I evaluated how much I am respected." D. I sought intrinsic rewards for myself." E. I demonstrated a positive attitude as expected of me."