Template for Bachelor thesis in International Business
Impact on Financial Statements
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Fair Value Accounting US GAAP VS IFRS
Impact on Financial StatementsThe fair value accounting method creates a complex accounting paradox for the accountants due to its hierarchy of fair value measurements. To understand the benefits and loopholes of fair value accounting in the later sections, how the fair value measurements and loss revaluations affect the financial statements – which creates complexity in minimizing market price, earnings, and cash flow volatilities despite providing current market prices of the assets. Figure 5 Impact on Financial Statements - Fair Value Accounting Source: Own Creation Unrealized gains/losses and impairments usually impact the financial statements due to marking the assets to fair value and by revaluating assets under fair value accounting (Walton, 2007).
The unrealized gains /losses arise due to adjustment of asset prices on the balance sheet under fair value accounting, i.e., investment properties under REITS and trading securities, equities, derivatives in the case of financial institutions. The other significant impact on the P&L statement is due to impairment charges. The impact of long-lived assets' revaluation and impairments are discussed in the steps below. IFRS allows both the historical cost method and revaluation method (fair value). Under the revaluation method, the carrying amount on the balance sheet is reported at the fair value minus accumulated depreciation instead of using historical cost. The property plant and equipment are later tested for impairments by comparing the Asset's recoverable amount and carrying value. Then the Asset is checked for any impairments by comparing the carrying value with the recoverable amount. If the carrying value decreases, then a loss is reported on the income statement, and if the carrying value is increased, then again is reported on the income statement. Under the fair value accounting in revaluation models, loss recoveries are allowed, unlike the historical cost method, where loss recoveries are not allowed. Investment properties are defined as assets that create capital appreciation or generate periodical rental income (Ayres, Huang and Myring, 2017). The investment properties are valued under the fair value model instead of the revaluation model, creating impairments. Under this model, the carrying value of the assets on the balance sheet is equal to the fair value, and increases (decrease) are reported on the P&L statement as unrealized gains (losses). The fair value accounting of intangibles is like the PP&E. Under fair value accounting, the goodwill is checked for impairment and is reported directly on the P&L statement. The impact of fair value accounting of financial instruments on financial statements is a little complex due to the nature of securities involved. The financial instruments include multiple deposits, which are shown as follows. The derivatives and fair value through profit & loss securities unrealized gains and losses are reported on the income statement. In contrast, the unrealized gains and losses related to fair value through other comprehensive income are not reported on the income statement but directly into the other total income in shareholders' equity. Download 383.21 Kb. Share with your friends:
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