TOPIC 4 Fair Value

8/9/2019 TOPIC 4 Fair Value

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TOPIC 4ISSUES ON THEAPPLICATION OF

ACCOUNTING STANDARDSFair Value AccountingPresente !or"

Dr# S$a%rul A%&ar A%&a

Presente '$"A(lina 'inti A%a&atNa(ura% 'inti )ista&a&Nurul S$a(*ani 'inti Rosli


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Ans*erLans&an -.//01

• Accoring to )art% -23341 ,ns t%atin5est&ent securities6 !air 5alues areincre&entall$ associate *it% 'an7 s%are

8rices a!ter controlling !or in5est&entsecurities6 'oo7 5alues#

• )art% et al# -23391 also ,n e5ience t%atloans6 !air 5alues are also incre&entall$

in!or&ati5e relati5e to t%eir 'oo7 5alues ine:8laining 'an7 s%are 8rices#

• Fair 5alues o! loans re;ect in!or&ationregaring t%e e!ault an interest rate ris7 o!

t%ose loans#


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• T%e$ consier re


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Ans*er " Georgiou ? @ac7-./221Use o! FV &easure&ent on t%e

asset

• In IAS 29 Accounting !or Pro8ert$ Plant an

E


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Use o! FV on t%e asset• IAS 2= Re5enue Recognition o'ser5e t%at t%e a&ount o!

re5enue in an e:c%ange o! non&onetar$ assets is nor&all$eter&ine using t%e !air 5alue o! t%e assets e:c%ange *%ilstIAS .. Accounting !or )usiness Co&'inations also incluere!erence to !air 5alues#

•

FRS 2B Tangi'le Fi:e Assets *%ic% 8er&its a c%oice as to*%et%er tangi'le ,:e assets are state at cost or at a re5alue

a&ount# T%ese stanars containe t%e conce8t o! !air 5alue*%ic% uring t%e 233/s 8la$e an increasingl$ 8ro&inent role int%e stanars o! t%e IASC an se5eral national stanar setters#

• T%roug% IAS 4/ In5est&ent Pro8ert$ t%at a88lies FVA to non,nancial assets an IAS 42 Agriculture -'ot% issue in .///1

re


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Use o! FV &easure&ent on t%elia'ilit$

• ,rst inclue t%e conce8t o! !air5alue in t%e 2300 ra!ts o! IAS 20Accounting !or Leases# In IAS 20 !air

5alue 8la$e a role in eter&iningt%e classi,cation o! a lease as eit%era ,nance lease or an o8erating lease

as *ell as in t%e eter&ination o!8ro,t or loss in sale an lease'ac7transactions#


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+uestion B

T%e use o! !air 5alue&easure&ents 8ro5ies

&ore rele5ant in!or&ation#Discuss#


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Ans*er)all -.//91

• Accoring to )all -.//91 %as state t%at t%eFV accounting rules aim to incorporate more-timely information about economic gains andlosses on securities, derivatives and other

transactions into the nancial statements,and to incorporate more timely information.• Fair 5alue incorporates more information into

the nancial statements#• Incor8orating &ore in!or&ation in t%e

,nancial state&ents '$ e,nition &a7es t%e&&ore in!or&ati5e *it% 8otential a5antagesto in5estors an ot%er t%ings e


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Ans*erLans&an -.//01

• Accoring to Lans&an -.//01 t%e !air 5alues*oul mitigate the use of accounting motivated-transaction structures designed to exploitopportunities for earnings management #

•

Fair 5alue accounting !or all ,nancial instru&ents*oul reduce the complexity of nancialreporting arising !ro& t%e &i:e attri'ute&oel#

• T%e researc% ,nings suggest t%at disclosed andrecognized fair values are informative toinvestors 'ut t%at t%e le5el o! in !or&ati5eness isaecte '$ t%e a&ount o! &easure&ent erroran source o! t%e esti&ates &anage&ent ore:ternal a88raisers#


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Ans*erOncioiu et al# -./2.1

• Eac% o! t%e current values measures a current ratherthan an historical attribute of the asset and looks to themarket rather than the specic transaction for evidence'ut t%is leas in eac% case to a egree o! esti&ation

'ecause t%e current &easures are not 'ase on actualtransactions 'ut u8on transactions t%at &ig%t ta7e 8lacein &ar7ets t%at are !ar !ro& 8er!ect an in t%e e:tre&e&a$ not e5en e:ist#

• T%ese ecisions are assu&e to 'e 8ri&aril$ t%ose &ae

'$ an in5estor an t%e$ t%ere!ore relate primarily to the prediction of future cash ows# Ho*e5er 8reiction oesnot i&8l$ &erel$ !orecasting an t%e concerns o!

ste*ars%i8 are also assu&e to 'e inclue in t%eo'ecti5e#


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Ans*erOncioiu et al# -./2.1

Continue• Ho*e5er *%en t%e cost &easure use is t%e

%istorical cost it coul 'e argue t%at suc%&easures cannot 'e co&8are in anecono&icall$ &eaning!ul *a$ 'ecause t%e&easure is e8enent on t%e ti&e o! ac


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Ans*erDeans -.//01

• T%e !air 5alue information to vary in relevancedepending on sector *%ic% 8riceto'oo7&easures are *iel$ use !or 5aluation 8ur8osesan t%ere!ore !air 5alue in!or&ation !or 'alance

s%eet ite&s to 'e &ore 5alue rele5ant in t%esesectors#

• T%e extent of usefulness of fair value informationto depend on the types of assets and liabilities#

• T%e FV !re


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Ans*er+ua% -./2.1

• T%e !air 5alue &easure&ent an isclosuresu88osel$ provide appropriate information torationalize the decision making process

• T%e greater uality of accounting informationand best informative content of the nancialreporting for managers on various organizationallevels or other stakeholders associated with theorganization.

• Poon -.//41 re8orte t%at !air5alue accounting8ro5ies &ore suita'le an &eaning!ul

in!or&ation to ecision&a7er t%an t%e %istoricalcost accounting#

• T%e !air 5alue e8ens &ore on &an$ esti&ates suc%as !uture &onetar$ ;o*s an iscount rates in cases o!illi


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• Pen&an -.//01 stresse on t%e a5antages o! t%efair value from perspective e of proponents arguingthat investors are much concerned with value

rather than cost so !air 5alue s%oul 'e re8orte#• T%e !air 5alue %as 'een issue consiering its

perceived features and the meaningful informationthey provide to help market partners makedi!erent decisions#

• T%e !air 5alue also consiere as more relevantcompared with historical costing provides betterindication to current risk an as a result ena'lein5estors ta7e correcti5e actions *it% res8ect to

cor8orate ecisions#• T%e !air 5alue is an ieal &oel re;ecting 8resent

&ar7et conitions 8ro5ie ti&el$ in!or&ation*%ic% increases trans8arenc$ an encourages

instant correcti5e action#


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Ans*er"Pen&an-.//01

Benefts o FVA

• In5estors are concerne *it% 5aluenot costs so re8ort !air 5alues#

• it% t%e 8assage o! ti&e %istorical8rices 'eco&e irrele5ant in assessingan entit$6s current ,nancial 8osition#Prices 8ro5ie u8toate in!or&ationa'out t%e 5alue o! assets#


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)ene,ts o! using FVA-con6t1

• Fair 5alue accounting re8orts assetsan lia'ilities in t%e *a$ t%at anecono&ist *oul loo7 at t%e& !air

5alues re;ect true econo&icsu'stance#

• Fair 5alue accounting re8ortsecono&ic inco&e

• Fair 5alue is a &ar7et'ase &easuret%at is not aecte '$ !actors s8eci,cto a 8articular entit$


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Ans*erPen&an-.//01

FVA HCA

• t%e 'alance s%eet 'eco&es

t%e 8ri&ar$ 5e%icle

! or con5e$ing in!or&ation to

s%are%olers

• t%e inco&e state&ent is t%e

8ri&ar$ 5e%icle !or

con5e$ing in!or&ation a'out

5alue to s%are%olers

•t%e inco&e -8ro,t an loss1

state&ent re8orts econo&ic

inco&e6 'ecause it is si&8l$

t%e c%ange in 5alue o5er a

8erio

•current inco&e !orecasts

!uture inco&e on *%ic% a

5aluation can 'e &ae

•inco&e re8orts t%e

ste*ars%i8 o! &anage&ent in

aing 5alue !or s%are%olers#

•earnings &easure t%e

ste*ars%i8 o! &anage&ent in

ar'itraging in8ut an out8ut

&ar7ets t%at is in aing

5alue in &ar7ets#


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Pen&an-.//01 ##con6tFVA HCA

-une:8ecte1 earnings 'eing a

s%oc7 to 5alue re8orts on t%e ris7 o!t%e e


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Source o inormation used in air value measurement:

Le5el 2 Valuation 'ase u8on


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2) Value relevance o air value(eseciall! "evel 3 air values) is

greater or frms #ith strongcororate governance.

T%is is 'ecause ,r& *it% ine8enent'oars %ig%l$ ,nancial literate auitco&&ittees acti5e auit co&&ittees t%e8resence o! institutional in5estors auit '$auitors !ro& large oMce an no &aterialcontrol *ea7nesses are less li7el$ to engage

in ,nancial re8orting 'iases#>anagers &a$ &ani8ulate in8uts !or !air5alue !or t%eir o*n interest# Ho*e5er *it% agoo cor8orate go5ernance t%is can 'e

reuce an t%e in!or&ation 8ro5ie *ill 'e&ore rele5ance#


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3) Fair value hierarch! disclosuredisaggregating t!e inormation #ith

level inormation #ill increase value orelevance to the inormation

>atri: !or&at !or re8orting !air 5alues'ase on assetsJlia'ilit$ t$8e an le5el o!in8ut *ill 8ro5ie &ore rele5ancein!or&ation# T%is *ill e8ens on %o* in5estorsierentiall$ 5alue in8uts across t%e t%ree

le5els an *%et%er t%e ,r&s re8ortsuMcient !air 5alue assets an lia'ilit$t$8es#


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Conclusion• Fair 5alue is t%e 'est a5aila'le &et%oolog$

!or eter&ining an re8orting t%e 5alue o!,nancial instru&ents co&8are to %istoricalaccounting

• Ho*e5er i! it %a 'een i&8le&ente 8oorl$'ot% FVA an HCA can 8rouce &isleaingin!or&ation an lea to ris7 accu&ulation8ro'le&s an t%e 8otential !or &ar7etistortion-Green'erg et.al,./2K1

• T%us i&8ro5ing t%e

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TOPIC 4 Fair Value