Also, the financial statement is a plus if fair market values are used because it follows the accounting principle of adequate disclosure. Adequate disclosure means that the company or the person responsible for the financial statements must present all relevant, reliable as well as understandable information needed to make an informed decision. Simply put, the preparers of the financial statements must present the accounting information with the end in mind that the financial data must not be misleading.
This shows that presenting financial data with total disregard of the fair market values would surely make the financial statements a bit misleading. The use of the fair market values would generate a big plus in the preparation of the notes to the financial statements because the notes would be more realistic. Whereas, not using the fair market values would not be a plus.
For, only a scarce group of investors would be interested in using a financial accounting data that is based on the estimates mathematically done in the head of the accountant or other persons working in the corporation with the responsibility of presenting financial accounting information(Nobes 2005). The financial information is a plus if the company uses fair market values because it is in compliance with the accounting principle of consistency. Consistency means the application of the same accounting principle between two financial accounting periods or between two competing companies.
Most of the companies will be using the fair market values in generating financial data. It is easier to compare and contrast the financial statements of two different accounting periods if only one type of accounting method, procedure or standard is used. On the other hand, not using the fair market values in the preparation of financial accounting data would have a high probability of violating the accounting principle of consistency between the financial accounting data between two competing companies for the other company.
The other company would be implementing the fair market values whereas the other company would still be other non fair market value accounting methods such as presenting only the historical or estimated values of the assets(Nobes 2005). The financial information is a plus if the company uses fair market values because it is in compliance with the accounting principle of comparability. Comparability means that the company has the ability to bring together different sets of financial information for the purpose of noting their similarities and differences.
Comparability includes comparing data between different accounting periods or between the financial accounting data of two competing companies. It is also easier to compare and contrast the financial accounting data between two competing companies in the same business type if both competitors use the same accounting procedure, standard or accounting principles. The compare process is needed in to determine what the difference between the two accounting periods in terms of sales, expenses, assets, liabilities, shareholders’ equity, gross profits as well as net profits.
The contrast process is needed to determine what makes one accounting period excel as compared to another accounting period. This process of contrast applies also to determine where and why one company excels when contrasted with another competitor(Gill 2007). The financial information is a plus if the company uses fair market values because it is in compliance with the accounting principle of materiality. Accounting theory states that accounting data that is material will affect the decision making process of the derivative investor as well as owners of businesses and shareholders of corporation.
The use of the fair market value is very material because it will surely sway the investors to increase his or her investment in derivatives, corporations, public listed companies, partnerships and other business ventures. Another example of materiality is the liability amounting to only of ? 100 to one of the company’s suppliers is not material when the total debt is ?150,000. The amount of ? 100 is only a small percentage of the total debt.
On the other hand, an accounts receivable amounting to 100 from one customer would be material if the total receivables is ? 500. On the other hand, not using the fair market values in the presentation of financial accounting data would violate the accounting principle of materiality. The investor in the derivatives market would surely miss the opportunity to invest in additional derivatives if they are not aware that the fair market of the derivative shows that there is a high probability that the prices of the derivatives will continue on an upward climb(Gill 2007).