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The Possibilities of the Appliance of Fair Value Concept in Croatian Public Sector

The purpose of this paper is to determine the necessary conditions for the appliance of fair value concept in Croatian public sector as well as the possible effects of its implementation for financial reporting of the entities of public sector and on state budget especially in the current conditions of the financial crisis. The main implication of fair value can be seen in valuation of public asset and liabilities, especially debts and sold state bonds. With this paper the authors will try to show that valuation based on fair value concept would show completely different picture about Croatian state budget debt and value of asset. The implementation of fair value concept in the public sector requires the application of accrual basis accounting and the corresponding accounting standards. The crucial issue in fair value concept is the determination of the fair value. The most critical area of fair value appliance is the measurement of financial instrument. The most objective reliable fair value is the market price of the financial instrument on active markets. If the market of the instrument is not active or there is no market for certain financial instruments, the fair value needs to be assessed. The assessment of fair value should be based on relevant market information with the application of certain valuation model. In the absence of relevant market information, the fair value should be assessed by using the discounted cash flow model. When the fair value of the financial instruments are assessed either by using the appropriate valuation model based on market information or by using the discounted cash flow model based on expected cash flows, the level of fair value reliability is much less than in the case when the fair value is determined on relevant market prices. The application of fair value concept in valuating financial instruments can create significant impact on financial position and income of the certain entity. The objectivity of the financial position and income of the entity depends on the reliability of the fair value valuation models.

public sector; state budget; fair value; accrual basis; IPSAS; asset; liabilities

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