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The main objective of this report is to discuss and analyse the basic objectives of the IASB, the major objective achievement, IASB in the present and the practical implication of implementing a fair value system of accounting, the argument for and against the inclusion of fair value in financial reporting and how the system of fair value has improved information to individual users in the economy.


In the global organisation there is a need to replace a specific financial regulation with a single set of accounting standard, the international accounting committee which was formed in 1973 to formulate and publish accounting standards in the interest of the public and to work generally by improving the harmonisation of regulation ,and also to promote their acceptance in the world wide with the objectives of financial statement by the international accounting standard committee to provide information about the reporting entities and financial performers and position to the wide range of users i.e. the investors ,government ,suppliers ,customers lenders bankers and employees who need basic financial ideas and position in order to generate an adequate certainty in their business entity.

The globalisation of capital market and the interest to an integrated capital market  by the international development for financial accounting have taken a greater measure in accounting  policies compared to the previous years and this is contributed by the -international accounting standard committee with the achievement of converting to the international accounting standard board

The international federation of accounting committee as the worldwide organisation bodies of the accountancy bodies with it purpose is to create or develop and enhance co-ordinated harmonised standard bodies.

The international accounting standard committee is in contrast to the national regulatory or standard setting bodies which operates within a national jurisdiction and form the legal government framework that defines and provide a level of authority.

Richard Lewis and David Pendrill advanced financial accounting

Seventh edition, prentice hall

What is international accounting standard board?

It is an independent, private-sector body standard that develops and approves by regulation bodies of International Financial Reporting Standards .The IASB operates under the oversight of the International Accounting Standards Committee Foundation. The IASB was formed in 2001 to replace the International Accounting Standards Committee with the following objectives;

  • To promotes the used of application of standards created.
  • To create a good reputation of convergences of national and the international accounting standard bodies to the high quality impression about them.
  • To develop public interest by setting up a single and enforcing a global accounting standard that give a clear view of the standards on financial report to improve the world capital market.

Richard Lewis and David Pendrill advanced financial accounting

Seventh edition, prentice hall

The structure of International accounting standard in the present

The international accounting standard board was formed in 2001 by the international standard committee which was set up for the non profit and happened to be the parent company. in the present this standard consist of 14 members 12 being full time members while 2 are part time members ,7 members out the full time have been chosen by the standard setters to promote convergence but would not be participating in  voting members.

In their 1st board meeting, their discussion was based on the conversion of the international accounting board to international financial report standard (IFRS) and this is fully in supported by the standard advisories and the European standard setting body and has direct the use of both the IASB and the IFRS by companies and organisations .further more it was also directed during their meeting to use the fair value accounting for financial instruments recognition and measurement.

According to the ASC governance can now rest with the Trustees and the board committees appointed by the Trustees with the provision of this constitution and trustees would use their power and ability to ensure that these requirements are observed with the public interest.

Above are some of the objectives achieved by the international accounting standard boards:

These are some of its functions of Trustees and frame work

  • Appoint   members of the board, the standing interpretation committee and the standards advisory council.
  • Monitor the effectiveness of the ASB.
  • Raise its funds
  • Their responsibility is to approve IABSs budget and are also constitutional changes.
  • To assist the board of IASC in development of future IASs existence.
  • To assist the national standard setting bodies in developing its standards.

Elliot Barry & Elliott Jamie, (2008). Financial Accounting and Reporting.

12th Edition, FT Prentice Hall.

Fair value

Fair value in financial report which is as known as the market to market value can be defined as the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction .The objective of a fair value measurement is to estimate an exchange price for the asset or liability being measured in the absence of an actual transaction for that asset or liability.

The IASB later change in the definition of fair value from 'the amount for which an asset could be exchanged, or a liability settled, between knowledge, willing parties in an arm's length transaction' to 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value is the appropriate approach for financial assets because it measurement is to estimate the value exchange of asset and liability in use, it provide investors with the estimated amount or value of balances in the balance sheet .the recognition of fair value which appears in the income,it is included as a component of the accumulated comprehensive income and recognised at amortised cost periodically also derivation to be measured and recognised at fair values.

According to an article, William Isaac, a former chairman of FDIC has blamed the credit crisis on the financial accounting standards which require that assets be valued in terms of their current market value, even if there is no market for them. Their claim was that this caused companies to write down asset values which may reduce banks' ability to lend. Also they have complaints and want the system of this accounting to be suspended.

Uses of fair value accounting in financial reporting

  • Fair value provides important information about financial assets and liabilities as compared to values based only on their historical cost (original price paid or received). Since fair value reflects current market conditions, it provides comparability of the value of financial instruments bought at different times. In addition, financial disclosures that use fair value provide investors with insight into prevailing market values, further helping to ensure the usefulness of financial
  • Fair value measures to comply with public reporting requirements, companies measure their financial instruments at fair value for a number of internal processes, including making investing and trading decisions, managing and measuring risks, determining how much capital to devote to various lines of business, and calculating compensation. The use of fair value measurements is deemed to be relevant in these areas.
  • Fair value is use to determined the value of asset and liabilities.

Measurement of fair value

Asset and liability are being measured using fair value because it reflects their condition at the date of acquisition in the process of impairment of an asset therefore; fair value would be limited to the recovery amount of that asset.

It was also discovered that the issue of fair value was addressed by an IASB exposure draft, fair value measurement, issued in May 2009. According to current accounting standards, the measurement of fair value is not well performed, showing that it 'provides neither a clear measurement objective nor a robust measurement framework.

  • Fair value is determined using the acquirer's accounting policies for similar asset and liability.

  • To determine some of the asset impairments

  • Some asset and liabilities are measured at it initial recognition using fair value method

  • Fair value is also used for measuring asset and liabilities at each balance sheet date.

These are some of the standards that require the use of fair value in measuring assets and liabilities.

  • IAS 11 - Construction Contracts
  • IAS 16 - Property, Plant and Equipment
  • IAS 17 - Leases
  • IAS 18 - Revenue
  • IAS 19 - Employee Benefits
  • IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance
  • IAS 26 - Accounting and Reporting by Retirement Benefit Plans
  • IAS 33 - Earnings per Share
  • IAS 36 - Impairment of Assets
  • IAS 38 - Intangible Assets
  • IAS 39 - Financial Instruments: Recognition and Measurement
  • IAS 40 - Investment Property
  • IAS 41 - Agriculture
  • IFRS 1 - First-time Adoption of International Financial Reporting Standards
  • IFRS 2 - Share-based Payment
  • IFRS 3 - Business Combinations and the June 2005 Exposure Draft
  • IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations accessed on 20/12/2009

Richard Lewis and David Pendrill advanced financial accounting

Seventh edition, prentice hall

Fair value measurement in the international accounting standards


The IASC has issued two basic ideas for the use of fair value and has all been adopted by both IASB and IFRS .The IAS 39 which deals with the financial instrument ,recognition and measurement described how financial asset  and liabilities are measured at amortise cost or fair value and when changes occurs in the financial statement .Furthermore the IASB and the IFRS 2 which is similar to the SFSB has issued standards in other of discoursers of financial instrument at fair value. Currently there are different measurements for financial instrument of asset and a liability depending on the very nature of that asset .I f an asset is to be measured through or using the IFRS it as different ways it could be measure depending on the current condition.

Fair values in IAS regulation has improve generally and gradually over the few years back and is still developing for future usage, the international accounting standard board has recognized the basic need to identify and clarify the need to use or apply fair value.

The measurement practice for financial instruments ,historical cost does not always produce a relevant and consistent information for users in  financial transaction for measurement of instrument mean while fair value system provide more  relevant  about asset and liability according to the a an information found in a book below.

According to IAS 39 suggestion, IASB should moved towards the full use of fair value accounting system for financial instrument .they also suggested that movement to fair value accounting would result to the total removal of the use of hedge accounting and that is not too good for the users of it because it would only confused them according to this statement, some of them are not certain.

Furthermore, it is consider as relevant measure for stake holders by the FASB. some of  the users of fair value method  believe that its represent  a better   and great company derivations and other financial instrument have had on it operation  i.e. it gives an ideal idea about a market value of company's assets and liabilities .Also it was confirm that when the of fair value is used, it leads to a greater volatility in earnings' ,because it shows current operations margins to the extent to which profit or loss reflects on the general inflation ,so as to select a particular information they need.

David Alexander ,Anne Briton and Anne Jorissen  International ,financial Reportng and Analysis

Importance of fair value accounting over historical cost accounting

  • Fair value provides recent information about assets and liability unlike the historical cost which provides information that is outdated i.e. say balance sheet would be representing a pass transactions.
  • It deals with the value of asset unlike the historical cost which has to do with the allocation of cost; it discloses the purchase price of an asset and depreciates in the next year thereby ignoring the possibility that the current market value of asset may be either higher or lower.
  • Historical cost is base on the assumption that the amount which an asset is purchase would be remain the same over a period of time but in real life the amount an asset is bought might be less or more expensive in future depending on the current market condition and it is not usually adjusted after a financial statement is prepared thus it increases the value of tax payable.
  • Fair value reflects the certainty of the market condition while historical cost represents the outdated statement and uncertainty of the statement and the future cash flows.
  • Fair value state the asset generated in the financial statement while historical cost does not.
  • It represents a better economist transaction and tends to make awareness of basic and important information in the economy.
  • It useful because it provides useful current information about businesses because many businesses around the world tend to change their regulation at any point in time so it states the present condition and not a past event.
  • Some of the intangible asset generated outside the business environment is not reported in the historical cost statement while it does in the case of a fair value method.

How fair value accounting has improved information available to users

  • It enable individual users to be able to identify cash flows very easily
  • It provides a very clear view of share holders in a company
  • It gives users the ability to have an extra knowledge of financial accounting
  • It is clear transparent
  • It provides important information about asset and liability compared to a value base or market value which deals with just the industrial cost
  • It aid investors with insight market value and help with the useful information on financial accounting.
  • Another advantage of fair value accounting for measuring the interest is that it does reflects the current cost of debt and also allowing the interest rate and credit risk.
  • It reflects the current market condition
  • It gives details analyses of  market value of assets and liabilities. 1/2/2010

Arguments for and against the inclusion of fair value in financial reporting 

Arguments for the inclusion of fair value in financial reporting

Arguments against the inclusion of fair value in financial reporting

Fair value which is the market to market value helps to identify the original cost of an asset because future cost cannot be determined accurately.

It is seen as a risk and unreliable method of accounting.

It provide more transparent to users because if asset and liability would be measure at the market value, it would help investors to avoid the losses that may result, therefore they would achieve a regulatory. Fair value system makes the earnings and the value of reserve more volatile i.e changes the values at any point in time therefore not giving an accurate figure. Fair value measurement is more relevant to investors and creditors because it reflects the current price of an asset.

Inaccuracy: it seen as the method of accounting which makes balance sheet overstated therefore is resulting to a wrong figure.

Investors need to know what assets are currently worth rather than it acquired

It is seen as a the main cause of credit crunch in the economy. It can reduce the risk in the balance sheet by increasing visibility. According to an article, William Isaac, a former chairman of FDIC has blamed the credit crisis on the financial accounting standards which require that assets be valued in terms of their current market value, even if there is no market for them. Their claim was that this caused companies to write down asset values which may inhibit banks' ability to lend.

It shows the impairment of assets. According to Tom Selling, writer in the Accounting blog, The Accounting Onion, believes people should move away from this method  because it is based on exit prices

Due to the fact that investors know what their asset is worth and since he bought them or sold them out, he would know the basic information about that asset i.e the terms and condition and the risk involve then avoid them for future usage. Its dose not show certainty for information. accessed on the 25/01/2010

Conclusions, implication and Recommendation

Considering the criticism on fair value accounting, my view is that the suspension of the fair value accounting as requested by banks in an article will only increase investors' uncertainty. The idea of considering only historic cost which refers only to cost allocation and not the value of the asset when there is the possibility of the current market value either being higher or lower will not meet the IASC framework of reliability of an asset which is very useful to provide information about the financial positions for economic decision making. It is ideal to say that the fair value helped to expose and reduce the various credit risks that were run by banks. Conversely, the fair value accounting is an essential assumption of a financial statement which is objectivity, qualitative characteristics of information with accuracy for an efficient presentation for the investors and markets as a whole. On the other hand, based on management's responsibility to investors, it will be very unrealistic for investors to be aware that assets invested in has been affected by the fair value accounting, should the current market value fall below the historic cost. With this, the IAS will have to initiate a type of fair value measurement which will motivate investors to invest. Considerably, the criticism was well justified, there is a need to address the fair value accounting.

Base on the preceding information, the argument for and against the inclusion of fair value accounting in financial reporting, the following recommendation will help the economist and the public at large to consider the use of fair value.

I recommend that fair value system of Accounting should be in full use as it aid both investors and economist with a details knowledge on their worth, It's very easy to work with because it is transparent i.e. given a clear view to users I also recommend the use of fair value because I believe that as time goes on it would be more reliable. Finally the issue of it being suspended would only increase investors uncertainty .


Richard Lewis and David Pendrill advanced financial accounting

Seventh edition, prentice hall

Elliot Barry & Elliott Jamie, (2008). Financial Accounting and Reporting.

12th Edition, FT Prentice Hall.  accessed on 20/12/2009 accessed on the 5/01/2010

David Alexander ,Anne briton and Anne Jorissen  International ,financial Reportng and Analysis 1/2/2010 accessed on the 25/01/2010


Fair value measurement considerations under International Accounting Standard (IAS) 39

IAS 39 is a mixed measurement standard whereby measurement depends on the classification of financial assets. Depending on the classification, measurement can be either at fair value or amortised cost.

Consistent with various other standards, fair value is defined in IAS 39 as the "amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's length transaction". Underlying this definition is a presumption that the reporting entity is a going concern without any intention or need to reduce significantly the scale of operations or enter into a transaction on adverse terms. Fair value is not, therefore, the amount that would be received in a forced transaction or a distressed sale.

For the purpose of determining an asset's fair value, IAS 39 distinguishes between two main types of instruments - those for which quoted prices in an active market exist and those for which a quoted price in an active market does not exist. IAS 39 explains that the existence of published price quotations in an active market is the best evidence of fair value and that value should be used with no adjustments.

Guidance is included explaining what the term "quoted in an active market" means: quoted prices should be readily and regularly available for example from an exchange, dealer or broker and those prices should represent actual and regularly occurring market transactions on an arms length basis.

Hence, if observed arm's length transactions are no longer regularly occurring even if prices might be available, or if the only observed transactions are distressed sales transactions, then the market would no longer be considered to be active. What is regularly occurring is a matter of judgement to be made in the light of the particular facts and circumstances.

If an instrument is not quoted in an active market, then under the fair value measurement hierarchy of IAS 39, fair value is to be determined on the basis of valuation techniques. If there is a valuation technique that is commonly used by market participants to price an instrument, and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, then that technique should be used. The overriding objective of using a valuation technique is to establish what the transaction price would have been, on the measurement date, in an arm's length exchange motivated by normal business considerations. In other words, valuation techniques should incorporate all factors that market participants would consider in setting a particular price.

The Board's objectives in the fair value measurement project are to:

  • establish a single source of guidance for all fair value measurements;
  • clarify the definition of fair value and related guidance;
  • enhance disclosures about fair value measurements; and
  • increase convergence between IFRS and US GAAP.

In response to the financial crisis, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) undertook several initiatives, which also have an impact on fair value accounting, including the following:

1. Setting up of a Financial Crisis Advisory Group by IASB and FASB

This is a high level advisory group which considers financial reporting issues arising from the global financial crisis. The results of the work of the Financial Crisis Advisory Group will feed into the work of related projects by the two boards. The advisory group aims to consider how improvements in financial reporting could help enhance investor confidence in financial markets. The advisory group also aims to help identify significant accounting issues that require urgent and immediate attention by the boards, as well as issues for longer-term consideration.

2. Reclassification Amendment to IAS 39

In October 2008 the IASB issued an amendment to IAS 39 "Financial Instruments: Recognition and Measurement" that permits the reclassification of some financial instruments in certain circumstances. The amendment to IAS 39 introduced the possibility of reclassifications for companies applying IFRSs, which were already permitted under US generally accepted accounting principles (GAAP) in rare circumstances. The deterioration of the world's financial markets that occurred during the third quarter of 2008 was referred to by the IASB as a possible example of rare circumstances which justified reclassification out of the trading category.

3. Guidance by the Financial Accounting Standards Board

On 2nd April 2009 the FASB published a Staff Position, FSP FAS 157-4 (FSP) Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly.

This guidance has been characterised as a relaxation of the rules for fair value accounting by allowing more freedom to use own valuation models, rather than a current market price where markets have become illiquid. The Economist in its April 11th issue commented: "On April 2nd, after a bruising encounter with Congress, America's Financial Accounting Standards Board (FASB) rushed through rule changes. These give banks more freedom to use models to value illiquid assets and more flexibility in recognising losses on long-term assets in the income statements ... European ministers demanded that the International Accounting Standards Board (IASB) do likewise. The IASB says it does not want to be "piecemeal" but the pressure to fold when it completes its overhaul of rules later this year is strong."

4. Six month timetable announced by the IASB to replace existing financial instruments standard

On 24 April 2009 the IASB announced a detailed six-month timetable for publishing a proposal to replace its existing financial instruments standard IAS 39. As per the announcement, the IASB's comprehensive project on financial instruments responds directly to and is consistent with the recommendations and timetable set out by the Group of 20 (G20) nations at their meeting in April 2009. G20 called for standard setters to "reduce the complexity of accounting standards for financial instruments" and to address issues arising from the financial crisis.

With regards to fair value measurement, the IASB noted that the guidance on fair value measurement issued by the FASB is consistent with existing guidance on IFRS contained in the IASB's Expert Advisory Panel report, Measuring and disclosing the fair value of financial instruments in markets that are no longer active. Therefore, the IASB noted, a level playing field exists in this area.

November 2009: IASB proposes to amend IAS 39 on impairment

On 5 November 2009, the IASB issued an exposure draft (ED) proposing to amendIAS 39Financial Instruments: Recognition and Measurementto modify the way impairment losses are recognised on financial assets measured at amortised cost. This is one of the phases of the IASB's comprehensive project to replace IAS 39.

The existing incurred loss model

Currently, IAS 39 recognises impairment of financial assets using an 'incurred loss model'. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.

IASB's proposed expected loss model

The model proposed in the ED is an 'expected loss model'. Under that model, expected losses are recognised throughout the life of a loan or other financial asset measured at amortised cost, not just after a loss event has been identified. The expected loss model avoids what many see as a mismatch under the incurred loss model - front-loading of interest revenue (which includes an amount to cover the lender's expected loan loss) while the impairment loss is recognised only after a loss event occurs. Proponents of the expected loss model believe it better reflects the lending decision. Under the IASB's proposed expected loss model:

  • Initial measurement.An entity determines the amortised cost carrying amount of a financial asset or portfolio of financial assets at initial recognition on the basis of the present value of future expected cash flows in considering expectations about future credit losses.
  • Subsequent measurement.Subsequent to initial recognition the entity re-estimates the future expected cash flows and determines the present value. An impairment loss is therefore recognised only if there is an adverse change in expected cash flows, and a reversal of impairment losses is recognised if there is a favourable change in expected cash flows with any adjustment recognised in profit or loss. All measurements are made on the basis of present values, not market values. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

Amortised cost is calculated based on the effective interest rate (EIR) method as present value of the expected cash flows over the remaining life of the financial instrument discounted at the EIR. Expected cash flows are estimates based on probability-weighted possible outcomes (that is, even if the most likely outcome is full repayment, the likelihood of the debtor not repaying all contractual principal and interest is also factored into the estimate). For a fixed rate financial instrument, the EIR is held constant over the life of the financial asset and does not change as market interest rates change. For a floating-rate financial instrument (such as a financial asset that pays LIBOR plus a fixed credit spread), the EIR is not a single, constant interest rate. Instead the IASB proposes that the EIR be determined by combining the spot interest rate curve for the benchmark interest rate (for example, LIBOR) and a derived initial effective spread. The IASB has published on itsWebsitenumerical examples accompanying the ED illustrating application of the mechanics of the EIR.

This expected loss approach will result in earlier loss recognition than the incurred loss model by taking into account future credit losses expected over the life of loans or other financial assets. Under this approach, an allowance for expected future losses is gradually built over the life of a financial asset by deducting a margin for future credit losses from gross interest revenue even if no losses have yet been incurred. This approach is based on the principle on which a lender would price a loan, that is, based on net yield after deducting a margin for expected credit losses.

The ED also proposes comprehensive presentation and disclosure requirements intended to enable users of the financial statements to evaluate the financial effects of interest revenues and expense and the quality of financial assets including credit risk.

Because of significant practical challenges in moving to an expected loss model, the IASB will establish an Expert Advisory Panel comprising experts in credit risk management to advise the board. Deadline for comments on the ED is 30 June 2010. Click forIASB Press Release(PDF 99k).

November 2009:Heads Upon IASB credit loss proposal

Deloitte United States has published aHeads Up Newsletter(PDF 172k) titledIASB Proposes New Approach to Accounting for Credit Losses. The newsletter discusses the IASB's recent exposure draftFinancial Instruments: Amortised Cost and Impairment, which proposes a fundamentally new approach to accounting for credit losses to replace the existing 'incurred-loss' model. The proposed approach, which affects the recognition of both net interest revenue and credit impairment, is designed to result in earlier loss recognition by taking into account future credit losses expected over the life of loans or other financial assets (an 'expected-loss' approach).

November 2009: Expert Advisory Panel on Impairment of Financial Instruments Measured at Amortised Cost

In November 2009, when it issued an Exposure Draft onImpairment of Financial Instruments Measured at Amortised Cost, the IASB announced that because of significant practical challenges in moving to an expected loss model, the IASB will establish an Expert Advisory Panel comprising experts in credit risk management to advise the board. Click for list ofAdvisory Panel Members(PDF 18k).