Measurement in Accounting

Penman (2007) had stated that historical cost may provide useful margins on turnover for forecasting operating cash flows in a going concern business. On the other hand, when valuing a portfolio of marketable investments with fair value, it tends to be more reliable. Stakeholder of Woolworths includes investors, creditors, lenders and so forth, their needs of accounting information are different. Some of the investors are interested in the information using fair value approach for them to decide whether to buy or sell their shares, some of the lenders and creditors are interested in the current value of assets and liabilities of the entity to decide the ability of the entity to pay off a debt when due. Further, a particular stakeholder need more than one measurement approach to satisfy their needs of accounting information (e.g. considering to engage with Woolworths). Therefore, mixed measurement approach would be more appropriate to satisfy each stakeholder needs of accounting information (Rankin et al., 2012; Dvorakova, D., 2011).

The field of accounting is constantly evolving. This is true not only for the theory of accounting itself but also the entities that govern its theory and practice. Presently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are faced with some of the biggest challenges to date. To understand the significance of these two boards, it is necessary to understand their histories, relations between the boards, and the standards that they set. Also how the knowledge of these boards and the field they lead, gained through the masters of science in accountancy

For our project, we wanted to pick the topic, “Is fair value accounting really fair?” The first part of our presentation was simply explaining what fair value accounting is. This is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transactions. According to the Financial Accounting Standards Board, the price that would be received to sell an asset or price to transfer a liability in an orderly transaction between market participants at the measurement date is the idea behind Fair Value accounting. FASB came up with SFAS 157 to improve this accounting principle. Some of their objectives were to “provide a framework for fair value measurements, change the definition of fair value, elaborate on the concept of market participants.”

19. The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the:

The most controversial topic of today’s time in the world of accounting is fair value. However, one common point of confusion is the scale of businesses affected by fair value, and when fair value came onto the scene. According to Robert Herz and Linda MacDonald “...the use of fair value in financial reporting is not new. In fact, it has been in place for decades, principally for financial assets. But even then, fair value is not required for all assets.” (2008) The idea of using fair value measurements goes back at least to the 1930’s when Kenneth MacNeal wrote Truth in Accounting. It wasn’t until 1993, however, until the FASB released SFAS 115. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. (FASB 1993) In 2006 the FASB released SFAS 157, which established a framework for measuring fair value. SFAS 157 also requires significantly more disclosures about fair value estimates than ever before. (FASB 2006) Finally the FASB issues SFAS 159, which permits entities to choose to measure many financial instruments and certain other items at fair value. (FASB 2007) These statements set the stage for the discussion of the advantages and disadvantages of fair value. Also discussed, will be the problems with implementation of a full fair value measurement system. That discussion will be followed by a brief summary.

The fair value of an asset is defined as ‘the price that would be received to sell an asset paid to transfer a liability in an orderly transaction between market participants at the measurement date” (Kieso, Weygandt, & Warfield, 2012). It is a market based measure (Averkamp, 2014). Over the past few years, Generally Accepted Accounting Principles has called for the use of fair value measurement in a company’s financial statements. This is what is referred to as the fair value principle (Kieso, Weygandt, & Warfield, 2012). The fair value of an asset or liability is based on an estimate of what the asset should be worth at the time of sale. This gives rise to some conflict among accounting professionals. It is believed that fair value may not be as accurate

Financial world is at the pace when the accountants are moving their steps towards fair value accounting, moreover FASB and IASB is motivating accountants to increase the use of fair value accounting by establishing new rules. Most of the people concur that fair values are the most reliable measure for financial assets and liabilities that an entity strongly trades, on the other hand some believes if management wants to hold an asset or liability till their maturity then historical method is best for measuring financial assets.

However, an asset is only recognized as per AASB 116 in financial statement if it is probable that the future benefits from the asset will eventuate and if the item has a cost or value that can be measured. (Leo, Hoggett & Sweeting, 2012) The term probable is means the like for the future benefit is higher than less likely to happen. An element will be considered as an asset only if it satisfy the probability of providing future benefits. (Aasb.gov.au, n.d.) An item will usually have a cost or value to use to measure reliably. The measurement of asset is made at its cost and appropriate measurement basis will be based upon model of accounting being applied. (Aasb.gov.au, n.d.) Items that so not have a cost or cannot be measured reliably cannot be considered as an asset. (Aasb.gov.au, n.d.)

Economic principle’s rationale for requiring guidance for financial institutions is to use mark-to-market accounting or fair value accounting on their financial reports. With the current economic crisis, questions have been raised as to whether or not fair value accounting is making this crisis worse. In this paper I review the history of fair value accounting and the ethics behind whether fair value accounting gives an accurate picture or is it causing a need for higher capital requirements and unnecessary concern with investors. There is a need for transparency. It is Accounting Standards and

IFRS 13 provides a principles-based framework for measuring fair value in IFRS. This is based on a number of key concepts including unit of account; exit price; valuation premise; highest and best use; principal market; market participant assumptions and the fair value hierarchy. Fair value is an important measurement on the basis of financial reporting. It provides information about what an entity might realize if it sold an asset or might pay to transfer a liability. In recent years, the use of fair value as a measurement basis for financial reporting has been expanded. Determining fair value often requires a variety of assumptions as well as significant judgment. Thus, investors desire timely and

The concepts of fair value have become popular in recent year; although historical cost is still consider more conservative and reliable. As study of the decision usefulness of fair value, definition and meaning of the term “fair value” are basically equivalent in FASB and IASB pronouncement. FAS 157 define fair value as “price would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. Hence, IFRS 13 fair value measurement fair value as the basis of an ‘exit price’ notion and uses a fair value hierarchy which results in a market-based rather than entity-specific measurement (IAS Plus

Verifiability helps ensure users that information faithfully represents the economic phenomena it purports to represent. The information in the Kingfisher’s financial statement has been faithfully represented, as their accounts are being audited by a big four firm named Deloitte

ACC307 INDIVIDUAL ASSIGNMENT TASK 1: Contemporary Issues of Accounting Theory Fair Value Measurement Overview After the International Accounting Standards Board (IASB) released the IFRS 13 Fair Value Measurement in May 2011 for the purpose of completing its joint project with the US Financial Accounting Standards Board (FASB) on fair value, the Australian Accounting Standard Board (AASB) released the Australian equivalent - AASB 13 Fair Value Measurement in the September of the same year. This standard permitted early adoption but generally started to take effect for the financial reporting periods beginning from 1 January 2013. This new standard requires no new requirement for the adoption and but it was accompanied with the issuing of AASB 2011-8 Amendments to Australian Accounting Standards arising from the AASB 13 which has made consequential changes to 32 standards and 9 interpretations for the adoption in Australia. The new standard attempts to unify IFRS and US GAAP by specifying how entities should apply the fair value measurements that applied in previous IFRS standards. It clarifies and redefines fair value as “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”, sometimes referred to as an “exit price”. It also sets out a single source guidance for a robust measurement framework to ensure that the requirements are applied consistently and have clear

“Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.” (Measurement Bases for financial accounting, 2005)

Business risks that plague today’s businesses can be far reaching and varied. The greatest business risk any company failing to continue as a going concern. The fundamental accounting principle of continuing as a going concern is a top consideration when conducting an Information