Value Relevance

The FASB mission statement states, “that it is to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities and provides decision-useful information to investors and other users of financial reports. That mission is accomplished through a comprehensive

Fair value measurement is one of the models which provide guidance on how entities should determine the fair value of financial instruments for reporting purposes. This paper discusses the Financial Accounting Standards Board (FASB) Exposure Draft issued on December 3, 2015 which proposed amendments to Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements. The paper analyzes some of the key points of the exposure draft, among other things, the history and development the concept of fair value management, the necessity of the amendments to the topic, the provisions and conceptual framework of the fair value measurement. The paper also compares and contrasts the FASB Topic 820 formerly known as to the International Accounting Standards (ISA) No. 13 of the International Financial Reporting (IFRS). Finally, the paper concludes on the response to the exposure draft.

2. Which of the following is not an objective of financial reporting described in FASB Concepts Statement No. 1? 
a. To provide information about how management of an enterprise has discharged its stewardship responsibility to owners.
B. To measure the current market value of the business enterprise.
c. To provide information so potential investors or creditors can make their own predictions of future

7. A valuation of the stock or a range of values that would provide a basis for an investment decision. Include the assumptions you make and your calculation steps. You may calculate the stock's required return from an SML or APT

Fair value accounting utilising market value as a benchmark to value company’s assets has drawn a lot of controversy.

The IASB and FASB have been working on a project together to minimize the differences in the way financial statements are presented to the public. Some of the major changes that we will notice in the statements are the adoption of the International standards. The information portrayed will be the same with some changes in the organization of the data. The changes are said to bring more understanding to the interpretability of financial statements as a whole.

It is very important that users of financial statements such as a company’s managers, stockholders, bondholders, security analysts, suppliers, lending financial institutions, employees, labor unions, regulatory authorities, and the general public (Gibson, 2013, p. 1) know the importance of a financial statements’ performance. But, what are these internal and external stakeholder groups using the financial reports for? According to Gibson (2013), they use the financial reports for making business financial decisions (p. 1). Potential investors use financial reports on whether to but stock, suppliers use financial reports on whether to sell merchandise to a company on credit, labor unions use financial reports to help figure out their demands when they make an agreement for employees, and last management use financial reports to resolve a company’s profitability (Gibson, 2013, p. 1). A good example, if anybody plan on having more than one hundred participants, a financial statement and a Form 5500 must be submitted to a Certified Public Accountant for audit (Reinhardt, 2014, p. 47). The audit will perform everything according to Generally Accepted Auditing Standards (Reinhardt, 2014, p. 47).

As discussed in the text (Dybvig, 2010), “value is not inherent in the commodity, good, or service to which it is ascribed. Rather, it is created in the minds of the individual who make up the market. The relationships that create value are complex, and values change when the factors that influence value change” (p. 2.1). There are a variety of factors that affect the

Following Fama’s (1970) landmark research papers, which explained the principals of the efficient market hypothesis, capital market efficiency has been a pre-eminent and ongoing research topic. Capital market research ‘explores the role of accounting and other financial information in equity markets.’The assumptions of market efficiency are central to capital market research. Market efficiency is considered important because if information is not assimilated into stock market rapidly of if new information appears in an anticipated manner, individuals may exploit this information.‘A market in which prices always fully reflect all available information is called efficient’ (Fama,1970:383). Markets are not

In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company).

In the CAPM, betas are generally estimated from the stock’s characteristic line by running a linear regression between past returns on the stock in question and past returns on some market index. Bringham and Ehrhardt (2005) define betas developed in this manner as historical betas. However, Fama and French (1992) argue about the reliability of beta in explaining the differences in expected returns. According to their studies, they have found empirical evidence that firm size, book-to-market, and earnings-to-price have significant explanatory power for average returns, calling into question the descriptive validity of the CAPM of Sharpe (1964), Lintner (1965), and Black (1972). The validity of the CAPM is questioned because of the CAPM posits a positive linear relation between ex ante expected returns and betas, while other firm specific variables such as firm size, book-to-market, and earnings-to-price should not have any ability to explain average cross-sectional returns. The empirical evidence of Fama and French thus contradicts the CAPM.

Hypothesis 2: The trend of stock price changes is proportional to the company’s performance absolutely, and the stock price changes only affected by operation.

As discussed above, the publishing of either the standards under the GAAP (SFAS 157 and SFAS 159) or the new standards from the convergence project (Topic 820 and IFRS 13) have the same intention to strengthen the consistency, comparability and transparency of fair value accounting. No matter fair value accounting is under GAAP or under IFRS, they have in common to reduce complexity of accounting, enhance understanding and reduce motivation to structure transactions so as to achieve certain accounting treatments for assets and obligations. The fair value standards emphasize that fair value is a market-based measurement and hierarchy of inputs is used in determining fair value estimates. The hierarchy gives the highest priority to observable market inputs and the lowest priority to unobservable market inputs. Especially Level 1 inputs transparently reflect fair value. At this point, fair value makes a company 's balance sheet more transparent and improves the investors’ insight. Investors may prefer the fair value methodology because it 's easier for them to determine what a company is really worth when its assets are valued at prevailing market prices. Moreover, basing on the available and comparable price data, companies can

Some of the gathered data such as the firm’s historical financial statements are adjusted so as to prepare the inputs required for the firm’s valuation methods and hence it leads us to the second step. The main financial statements required for the firm’s valuation are the income statement and the balance sheet that are produced by the accounting process. This further shows the relationship between firm valuation and accounting. The best way to value a firm with a historical approach would be looking at the historical statements, income statement and balance sheet. Smaller firms should be looked at the last three to five years while larger firms should have a longer period to check. Due to the fact that, business owners have considerable discretion in how they use the firm’s assets and also what expenses and income they recognize, this rise the need to adjust the firm’s historical records. Constructing an accurate relationship between the required firm’s assets and

Potential investors can provide capital in two broad forms - providing either equity or debt to the firm. Equity investors look to buy a firm’s shares, and in return, expect to gain dividends and an increase in share price. Equity providers are primarily concerned with information pertaining to “the amount, timing and risk of future cash flow” (Cascino et al, 2013). On the other hand, debt providers are concerned with information related to the financial stability of a firm to ensure the firm can continue it’s debt repayments.