Accounting involves the use of fair value measurement and fair value disclosure in developing financial statements. Fair Value Measurement defines fair value, establishes a framework for measuring fair value, and requires significant disclosures. The International Accounting Standards Board wanted to enhance disclosures for several reasons. Enhanced disclosures allowed users to assess the valuation techniques and inputs used to measure fair value. Fair value methods become essential in determining the value of the current assets of an institution. Historically, fair value has had a different meaning depending on the context and usage. Consequently, fair value focuses on the assumptions of the market place. Besides, fair value is not entity-specific and so takes into account any assumptions about risk. Therefore the fair value is measured using the same assumptions used in GAAP. Lastly, accountants should consider fair value measurement and fair value disclosure in knowing the prices of assets.
FAIR VALUE DISCLOSURE EFFECTS ON FINANCIAL STATEMENTS
A new Financial Accounting Standards Board disclosure requirement makes several material changes to U.S. GAAP. New requirements for determining the fair value disclosure of financial institutions’ loan portfolios are among the revisions. The guidance has already impacted public business entities at the beginning of this year. The businesses will measure fair value using the exit price notion consistent with fair value disclosure effects on financial statements. Additionally, Fair value measurement rules are considerate of the new fair value disclosure amendments. The change to GAAP eliminates the entry price method previously used for disclosure purposes for some financial assets. Prior, GAAP permitted institutions an option to measure fair value in two different ways. Finally, Changes to the fair value measurement and fair value disclosure will impact the fair value methods of public businesses.
FAIR VALUE METHODS AND STOCK OPTION VALUE CALCULATION
Calculating the value of a stock option using fair value measurement before it is used to buy or sell a stock is difficult. The difficulty is because knowing the market value of the stock when exercising the option is impossible. To demonstrate the difficulty, Robert C. Merton and Myron S. Scholes received the 1997 Nobel Prize in Economics for their work. Collectively, their work centered on creating a method to calculate the fair value of stock options: the Black-Scholes method. There are several fair value methods for estimating the fair value of stock options. Public companies are required to choose which method they wish to use to calculate the fair value of stock options. Nonpublic companies use the intrinsic method, which deducts the price of the stock option for the current market price. Fair value measurement and fair value disclosure are also important in calculating stock option value.