What is fair value with changes in results?
The value of assets and liabilities at fair value through profit or loss on a balance sheet. It is a valuation method that is used in particular for the valuation of financial instruments. These types of assets have a value that is constantly changing due to changes in the market. This method allows an entity to determine the fair value of the financial instrument at the time of its acquisition or recognition and to make changes to its carrying amount when a balance sheet is created taking into account fair value changes in profitability.
The concept of fair value is an accounting standard for the valuation of assets that do not have a fixed market value. The only way to finally determine a market value is to sell the asset. By determining a fair value, a company can track the asset in the accounting system for tax purposes without having to sell it. This is an estimate that takes into account the types of factors that would affect value if the asset were sold.
There is a specific procedure to determine the fair value of financial instruments held by companies as assets or liabilities, established by national and international accounting bodies. The issuance of financial assets includes their market value variation. For example, stock markets can be volatile and a company's stock can change in value multiple times over the course of a single day. Likewise, corporate liabilities, such as bonds issued, change with the rise or fall of government interest rates.
According to accounting standards, companies can measure assets and liabilities by determining fair value through profit or loss. This type of value creation is one of the four ways a company generally classifies financial assets and one of the two ways it classifies liabilities. Assets can be classified as measured at fair value through profit or loss, or available for sale, as accounts receivable or loans, or as held-to-maturity investments. Liabilities can be measured at fair value through profit or loss or classified at amortized cost.
Assets and liabilities measured at fair value through profit or loss are classified as designated or held for trading. A designated asset or liability was selected for measurement in this manner at the time of acquisition. An asset held for trading or a liability held for trading is valued using this method, but only in the short term.