Current Topics in Accounting: Relevant Issues
1a. Describe the impact that implementing FAS 157 had on EMC's financial statements, based on the footnote information provided. Can you tell if the current economic conditions influenced the valuation of their financial assets and liabilities from this disclosure? If yes, what information told you this, if not, what information do you feel is missing? As an investor, would this disclosure give you enough information to be satisfied that this is a truly fair valuation? Why or why not?
Fair value is an important accounting concept that is used in determining the value of liabilities and assets to be reported in the financial statements. It is guided by the FAS No. 157 that establishes the frame work used in measuring the fair value in line with the generally accepted accounting principles and the way the fair value of assets and liabilities should be disclosed.
The value is based on the exchange price that will be received for assets if disposed or paid for the liabilities in the most promising market on a particular date. The prices could be quoted from an active market, from quotation of a similar market in the same industry or unobservable inputs that do not have any market activity to support it. It is, therefore, clear that while determining the fair value of a company, contraction and the expansion of the economy will be captured in the financial statements. If the economy is doing well, the financial statements will indicate that the company is valued higher than in restrained times. In addition, in line with the full disclosure accounting concept, fair value provides reasonably astute financial statement users with comparable information that enables them to identify differences between and similarities in two or more...