Which of the following is true about the treatment of fair value measurements?

• A. They are exclusively used for long-term assets
• B. They adjust the carrying amount of financial assets only
• C. They aim to give a more accurate representation of financial statements
• D. They eliminate the need for regular accounting adjustments

Answer: (C)

Fair value measurements aim to provide a more accurate representation of financial statements by reflecting the current market conditions and the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This allows for a more relevant and timely understanding of the value of assets and liabilities as they can change over time due to various factors such as market fluctuations, interest rates, and other economic variables.

By using fair value measurements, companies can better communicate the true financial position and performance, allowing stakeholders to make informed decisions based on up-to-date information. This approach contrasts with historical cost accounting, where assets are recorded at the original purchase price, which may not reflect their current market value.

Options suggesting limitations to fair value measurements, such as their exclusive use for long-term assets, or that they only adjust financial assets or eliminate the need for regular accounting adjustments, do not accurately capture the comprehensive nature and purpose of fair value accounting. Fair value measurements can apply to both short-term and long-term assets and liabilities, encompass a wide range of financial instruments, and do not replace the necessity for continuous adjustments in accounting practices to ensure accurate and fair representation of a firm's financial status.