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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 promote the use of application of standards created.
To create a good reputation of convergences of national and the international accounting standard bodies to a high quality of impression about them.
To develop public interest by setting up a single and enforcing a global accounting standard that gives 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 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.
Â 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
http://www.pwc.com/cy/en/articles/2009/fair-value-accounting-jul09.jhtml 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.
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.
http://www.iasplus.com/agenda/fairvalue.htm 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 .