Issues of Implementing Fair Value Accounting in Emerging Economies
QUESTION 3
The fair value accounting has ensured accuracy in the operation of different organizations and business. The fair value valuation ensures that the organization practice a robust internal control process to make reasonable and consistent valuations an argument supported Bies’ (2012), Fair value accounting. These valuations should be subjected to independent review as required by the internal control process in order to ascertain that they reflect the underlying conditions of the market and they can’t be changed without having been approved as ascertained by He, Wong, and Young’s (2012), Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China.
The process involved in the determination of the fair value of an instrument is based on how easy it is to determine the price of that particular instrument. Fair value is considered as the price at which a willing seller and buyer agree to trade, and therefore, according to Barth, Landsman, and Wahlen’s, (2014), Fair value accounting: Effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows and Nobes’ (2015), IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the EU, finding the right price is the key to valuation. When the estimation of the fair values is done by the use of unadjusted or adjusted market prices, then they are referred to as the mark-to-market values. In case of unavailability of the market prices for the same or similar positions, then the firms must undertake estimation of the fair values by use valuation models. It is required that these models be applied by use of observable market inputs (for instance, interest rates and the yield curves which are observable at normally quoted intervals). On the other hand, when the estimation of fair values is done using the valuation models, they are called mark-to-model values. Moreover, the fair value is a fundamental concept for the firms to be able to manage their income through a system of selective realization of cumulative unrealized losses and gains on positions.
QUESTION 5
Discussion on the consistence and difference in the findings with the literature reviewed.
Concerns about the application of the fair value option have been voiced on different platforms. The International Accounting Standards (IAS) has acknowledged the concerns that fair value accounting may be used in a way which is inappropriate and make clear its intention to create a limit in the application of the fair value option to particular categories of the financial instruments. This is done in order to create a requirement that the fair values be verifiable to enable recognition of the role of prudential supervisors (Bies, 2012).
Moreover, the difference with the accounting literature reviewed comes in that; evaluation entails significant judgment, and there is a likelihood that the different techniques of valuation provide different results. The difference is created due to the inputs used, and if there are any adjustments done to these inputs which may differ with respect to the technique deployed. Such differences do not mean that any of the techniques deployed is incorrect. However, the IFRS 13 does not plainly require that an investor uses several valuation techniques. Therefore, selecting most appropriate valuation technique would depend on circumstances and facts, thereby requiring a consideration of more than a single technique in order to make it possible to compare the results of multiple techniques (Nobes, 2015). The investor then must understand the rationale behind the differences in valuation and be able to select the amount within the ranges of values which is the most representative of the fair value of the particular unquoted equity instrument.
Barth, Landsman, and Wahlen (2014) put forth a similar perspective on the concept of fair value accounting that in the American Securities Exchange, the recognition of fair value on liabilities and assets tend to have the backing of the Securities and Exchange Commission (SEC). Thereby, highlighting the benefits of the fair value accounting first encompasses the mitigating application of accounting-motivated structures of the transaction which are designed with an aim of exploiting the opportunities for earnings management as created by the system of “mixed attribute” which is partly fair values, partly historical cost.
Additionally, the literature review affirms that in the framework of fair value accounting, the aspect of “historical cost accounting” is assumed to be the default. The difference between the two is that the historical cost accounting is referred to as the “historical transactions accounting” since it derives its basis on reporting value added from the transactions of the market instead of the fluctuations of the market prices (Barth, Landsman, and Wahlen, 2014). Therefore, the fair value accounting is sufficient of the shareholder reporting objective by accounting for the liabilities and assets in the balance sheet at some fair value.
On the other hand, the findings get a contradictory stance from Nobes (2015), in which there is an argument that even though, it is agreed that the fair value accounting yields a relative more relevant measure than the historical cost, it has never been considered to be perfect. There are two controversies surrounding the concept of fair value accounting today: first is the efficient application of fair value measurements in illiquid markets, second, is when and how modeling is supposed to be applied as the method of determining fair value.
Bibliography
Barth, M.E., Landsman, W.R. and Wahlen, J.M., 2014. Fair value accounting: Effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows. Journal of banking & finance, 19(3), pp.577-605.
Bies, S.S., 2012. Fair value accounting. Fed. Res. Bull., 91, p.26.
He, X., T. J. Wong, and D. Young. 2012. Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research 29 (2):538-562.
Nobes, C. 2015. IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the EU? Accounting in Europe, 12 (2):153.
