Template for Bachelor thesis in International Business
Fair Value Accounting Method
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Fair Value Accounting US GAAP VS IFRS
Fair Value Accounting MethodIn 1982, the fair value concept was first defined through a contemporary issue under IAS- 20 issued by IFRS. The concept and the underlying definition of fair value remained identical to the most recent definitions provided under IFRS - 13 (Miroslav Škoda and Peter Bilka, 2012). The fair value accounting concept can be defined as "The amount for which an asset can be exchanged between knowledgeable and willing parties in an arm's length transaction" (Miroslav Škoda and Peter Bilka, 2012). The IFRS tried to elaborate and further explain the concept through IAS 40, which clarifies the applicability of the fair value accounting method to the potential recipients of information such as investors, auditors, analysts, and accountants. According to IFRS, knowledgeable parties are defined as "reasonably informed" about all the utilities, features, forms, market value of the Asset, and prevailing market environment at the time of the transaction. A willing buyer is a buyer who is not under any pressure to buy the Asset. A willing seller is a seller who is not forced to sell below the market value of the Asset in a transaction where both parties have no prior mutual understanding in any case (at arm's length transaction) (Miroslav Škoda and Peter Bilka, 2012; Šodan, 2015). The concept of fair value accounting is deeply embedded in providing current market prices of assets and liabilities through financial statements to the investors, appraisers, and accountants to help make an economic decision - that is why the fair value accounting corresponds to the "Exit Price" of the assets. Under fair value accounting, firms periodically report changes in their assets and liabilities on the balance sheet. Changes are referred to and reported as unrealized gains & losses on the income statements. The new information regarding the future cash flows and discount rates results in unrealized gains & losses (Laux and Leuz, 2009; Michael D. Greenberg et al., 2018). These unrealized gains & losses, including the assets impairments, have created extra noise and volatility in earnings per share. Consistent revaluation and loss revaluations have added much complexity for the investors and analysts, and accountants. (Doliya and Singh, 2015). Figure 4 Fair Value Accounting & Measurement under U.S. - GAAP & IFRS
Source: Own Creation Fair value accounting offers fair value measurement under both accounting systems. Still, the scope is limited under the US GAAP – where financial instruments including derivatives, trading securities, and Available-for-Sale securities are measured at fair value (Ian Welch, 2009). Under IFRS, fair value accounting consists of the revaluation method and the fair value method. The revaluation method is used for investment properties, intangibles, and property, plants, and equipment, where the fair value of assets is reported as fair value minus accumulated depreciation (Robinson, 2020; Weygandt, Kimmel and Kieso, 2015). The historical cost method provided "value in use," which is the P.V. of the future cash flows discounted at an appropriate rate, but the fair value method and accounting don't provide the value in use, or it cannot take into account the additional value derived through value-enhancing strategies, e.g., the inclusion of Asset in a portfolio. The make influential economic decision investor's required accurate and timely information regarding historical and current performance, including their future business strategy – which then can be incorporated into future forecast to arrive at the current price or value of the Asset (Da and Warachka, 2009; Dudycz and Praźników, 2020). Fair value accounting, through fair value measurement, tried to replace the conventional valuation based on cash flows with the market prevailing current asset price based on relative valuation (Ellul et al., 2015; Elsiefy and ElGammal, 2017). Fair value accounting requires input to establish the value through the hierarchy of fair value measurements based on data availability and from most to least reliability. Download 383.21 Kb. Share with your friends:
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