Essay Sample: Fair Value Reporting

Fair value refers to the price of an asset agreeable by two parties, a seller and a buyer, assuming that all parties have similar information. It also refers to the value of an organization's assets or liabilities at the date of valuation. In the accounting field, a fair assessment is a crucial tool used in many procedures for example in business combinations where a parent has to value the assets and liabilities of the subsidiary at the date of acquisition, and it is also used to determine the value of assets or liabilities that do not have an active market. There are different ways to conduct fair valuation and the most common approaches to assessment include discounted cashflows approach where any future cash flows generated by the said asset are discounted to its present value to determine the fair value of the asset or where an asset has an active market then the prices quoted in the said market can act as a guide on the fair value of an asset.

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Fair valuation is essential to all business entities. It can be demonstrated as follows in the acquisition of a subsidiary the parent company would want to pay just above the true worth of the subsidiary and not in excess which means that through fair valuation an entity's actual value is determined hence there will be no overpayment to acquire assets or liabilities in future.

Through fair valuation, an entity's exact position is determined. Stakeholders of such an entity can monitor the company's performance through its assets and liabilities valuation, and any concerns can be addressed effectively.

Firms can take advantage of fair value reporting, for example, in derivatives where a company through fair valuation can purchase derivatives in the financial markets. Such derivatives allow the firm to conduct business at subsidized rates for example when using a forward contract one enters an agreement for the completion of a certain transaction at a fixed exchange rate which means that if the exchange rates were unfavorable at the time of the transaction, then the loss would be avoided.

Some company assets have to be valued using the fair valuation, for example, financial instruments and investment properties. Changes in the fair values are reported either to the income statement or other comprehensive incomes section.

Reporting Requirements for Defined Contribution and Defined Benefit Plan

A defined-contribution plan is a plan where a company pays a fixed sum to a fund. They do not have any legal obligations if the fund cannot pay all employee benefits using the available assets. The accounting treatment is rather simple. The entity recognizes the amount payable into the fund at the end of each reporting period, and it is compared to what is paid into the fund to get an accrual or prepayment.

A defined benefit plan is a plan where the employer or the entity is charged with the responsibility of ensuring that the employee benefits are settled. It involves estimation of the future payments to be made and recognition of any expenses related to the continuous services of existing employees. The accounting treatment for a defined benefit plan requires the entity to recognize an asset known as the fair value of plan asset and liability known as the obligation's present value. There are several factors to be recognized in this case, for example, determination of actuarial gains and losses on the plan asset and the liability, recognizing the expenses for the current reporting period including interest cost components, current, and past service costs, gains and losses on curtailment. Other requirements are also imposed, including the performance of special procedures like asset ceiling where there is an abnormal balance(net surplus), amendment of the benefit plan, and determination of vesting conditions. A defined benefit plan requires actuarial valuation to determine the asset's value and liability at the end of each reporting period. The difference between the actuarial values and the book values are recognized as part of other comprehensive incomes.

A defined contribution plan is the best form of the pension plan for the client to offer. As can be observed, a defined contribution plan is a simple pension plan scheme in terms of reporting requirements and accounting treatments. One would avoid the complex accounting computations required in a defined benefit plan, such as recognizing the asset and the liability, which involves complex calculations. There also are no legal obligations on the employer's part to ensure that the employee receives the benefit. What it means is that the employer will contribute a fixed amount of money towards the scheme. Still, if the scheme cannot settle all the employee benefits, the employer is not obligated to pay any amounts over and above the usual contribution.

In a defined contribution all that is required is the recognition of the amount paid to the scheme. If the entity pays more than the agreed contribution then the entity can record a prepayment in its balance sheet. In contrast, if the entity pays less than the agreed contribution, then the entity recognizes a liability(accrual) in the financial statement. Based on all these factors, the defined contribution plan is the best pension scheme to offer the employees.