Fair value accounting involves recording assets and liabilities at their current market value. This method provides a more accurate reflection of an entity’s financial position. Here are examples of journal entries for various scenarios involving fair value accounting, such as initial recognition, subsequent measurement, and adjustments for changes in fair value.
Initial Recognition at Fair Value
Scenario: ABC Pvt Ltd acquires an investment property for ₹10,00,000, which is its fair value at the acquisition date.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Investment Property A/c | 10,00,000 | |
| To Cash/Bank A/c | 10,00,000 | |
| (Being acquisition of investment property at fair value) |
Explanation:
- Investment Property A/c is debited to recognize the asset at its fair value.
- Cash/Bank A/c is credited to reflect the cash outflow for the purchase.
Subsequent Measurement and Fair Value Adjustment (Increase)
Scenario: At the end of the accounting period, the fair value of the investment property increases to ₹12,00,000.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Investment Property A/c | 2,00,000 | |
| To Fair Value Gain A/c | 2,00,000 | |
| (Being recognition of fair value increase in investment property) |
Explanation:
- Investment Property A/c is debited to increase the value of the property.
- Fair Value Gain A/c is credited to record the unrealized gain.
Subsequent Measurement and Fair Value Adjustment (Decrease)
Scenario: In the following period, the fair value of the investment property decreases to ₹9,00,000.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Fair Value Loss A/c | 3,00,000 | |
| To Investment Property A/c | 3,00,000 | |
| (Being recognition of fair value decrease in investment property) |
Explanation:
- Fair Value Loss A/c is debited to record the unrealized loss.
- Investment Property A/c is credited to decrease the value of the property.
Fair Value Adjustment for Financial Instruments
Scenario: ABC Pvt Ltd holds equity investments initially recorded at ₹5,00,000. By the end of the period, the fair value increases to ₹6,00,000.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equity Investments A/c | 1,00,000 | |
| To Unrealized Gain on Investments A/c | 1,00,000 | |
| (Being recognition of fair value increase in equity investments) |
Explanation:
- Equity Investments A/c is debited to increase the value of the investments.
- Unrealized Gain on Investments A/c is credited to record the unrealized gain.
Fair Value Adjustment for Liabilities
Scenario: ABC Pvt Ltd has a financial liability initially recorded at ₹4,00,000. The fair value of the liability decreases to ₹3,50,000.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Financial Liability A/c | 50,000 | |
| To Fair Value Gain A/c | 50,000 | |
| (Being recognition of fair value decrease in financial liability) |
Explanation:
- Financial Liability A/c is debited to decrease the value of the liability.
- Fair Value Gain A/c is credited to record the unrealized gain.
Impairment and Reversal of Fair Value Adjustment
Scenario: ABC Pvt Ltd holds an asset initially recognized at fair value of ₹8,00,000. During the period, an impairment test shows the fair value drops to ₹6,00,000. Later, the fair value increases back to ₹7,00,000.
Impairment Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Impairment Loss A/c | 2,00,000 | |
| To Asset A/c | 2,00,000 | |
| (Being recognition of impairment loss) |
Explanation:
- Impairment Loss A/c is debited to record the loss.
- Asset A/c is credited to reduce the asset value.
Reversal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Asset A/c | 1,00,000 | |
| To Reversal of Impairment Loss A/c | 1,00,000 | |
| (Being partial reversal of impairment loss) |
Explanation:
- Asset A/c is debited to increase the asset value.
- Reversal of Impairment Loss A/c is credited to recognize the gain.
