Fair Value Concept Specifics in Financial Reporting and Auditing

AbstractInvestors have become the most important users of financial statements in modern business conditions, and mixed base of financial reporting has been established in order to meet their information needs and it includes elements of the concept of historical cost and the fair value concept, with an increasing shift towards the fair value concept. The primary task of fair value accounting becomes the expression of the fair value of the net assets at the reporting date, while the financial results represent the change in fair value of net assets between the two reporting periods. In our country the application of the "full IFRS" is mandatory for large enterprises and the application of IFRS for SMEs is mandatory for small and medium-sized entities, thus fair value accounting becomes an integral part of the financial statements of domestic companies. However, fair value accounting is not a suitable concept for our country characterized by shallow and underdeveloped financial market, companies whose owners are the company managers at the same time, and low level of economic and technological development. A financial statement audit in terms of the use of the fair value concept becomes much more demanding and complex than the audit of the financial statements based on historical cost accounting.

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Примена опрезности у финансијском извештавању – навика или потреба? // Application of prudence in financial reporting – a habit or necessity?

ACTA ECONOMICA ◽

10.7251/ace1522063s ◽

2018 ◽

Vol 13 (22) ◽

pp. 63

Author(s):

Ката Шкарић Јовановић

Keyword(s):

Conceptual Framework ◽

Financial Reporting ◽

Empirical Studies ◽

Financial Statements ◽

Radical Change ◽

Fair Value ◽

Time Asymmetry ◽

Historical Cost ◽

Primary Users ◽

Gains And Losses

Резиме: Финансијско извештавање већ више векова с правом се означава као конзервативно. Начело опрезности чија премена генерише конзервативизам, а које се одликује временском асиметријом у признавању губитака и добитака, не само да је једно од најстаријих, већ и једно од најутицајнијих правила у финансијском извештавању. Означавање инвеститора, поверилаца и осталих зајмодаваца као примарних корисника финансијских извештаја довело је до тога да се у Концептуалном оквиру финансијског извешавања неутралној презентацији финансијских извештаја даје апсолутни примат у односу на опрезност, која је означена као непожељна. Бројна емпиријска истраживања, у великој мери изазвана и оваквом радикалном променом, показала су да су користи од примене конзервативизма у финансијском извештању и у данашњим околностима такве да се увелико надилазе његове слабости. С дуге стране, неутралност се може постићи у презентацији појединих позиција финансијских извшетаја али не при постојећим околностима и финансијских извештаја у целини. Заменом опрезности са неутралношћу нарушена је конзистентност која је нужна између Концептуалног оквира за финансијско извештавање и МРС/МСФИ. У многим од МРС/МСФИ садржани су захтеви за признавање и вредновање који су засновани на опрезности. Испуњавање ових захтева неминовно води конзервативизму у презентацији финансијских извештаја. Како су МРС/МСФИ изграђени на мешовитој основи коју чине: концепт историјског трошка, с којим је чврсто повезана опрезност, и концепт фер вредности, за који се везује неутралност. Стога се сасвим основано у презентацији финансијских извештаја могу очекивати и неутрално и конзервативно презентиране информације. Враћањем опрезности у Концептуални оквир финансијског извештавања осим што би била отклоњена неконзистност која постоји између њега као основе на којој се ревидирају постојећи и доносе нови стандарди, био би потврђен допринос конзервативизма заштити интереса поверилаца и инвеститора.Summary: For many centuries financial reporting has been rightfully labeled as conservative. The principle of prudence whose application generates conservatism, which is characterized by time asymmetry in the recognition of gains and losses, is not only one of the oldest but also one of the most influential rules in financial reporting. Determining the investors, creditors and other lenders as primary users of financial statements has led to the fact that in the Conceptual Framework for Financial Reporting the neutral presentation of financial statements has the absolute precedence over prudence, which is marked as undesirable. Numerous empirical studies largely caused by such a radical change have shown that the benefits of application of conservatism in financial reporting and in the present circumstances are such that they greatly surpass its weaknesses. On the other hand, neutrality can be achieved in the presentation of certain positions in financial statements but not under the existing circumstances and financial statements in general. Substituting prudence with neutrality violates consistency, which is necessary between the Conceptual Framework for Financial Reporting and IAS/IFRS. Many of IAS/IFRS contain requests for recognition and validation that are based on the prudence. Meeting these requests will inevitably lead to conservatism in the presentation of financial statements. Since IAS/IFRS are built on a mixed basis consisting of the historical cost concept, which is tightly linked with prudence, and fair value concept, which is linked with neutrality, then it is quite reasonable to expect both neutrally and conservatively presented information in the presentation of financial statements. By restoring prudence in the Conceptual Framework for Financial Reporting, besides eliminating inconsistence that exists between it as a basis for revising existing and adopting new standards, contribution of conservatism to protecting the interests of creditors and investors would be confirmed.

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ФОРМУВАННЯ ОБЛІКОВОЇ ПОЛІТИКИ ЗА ПРИНЦИПОМ БЕЗПЕРЕРВНОСТІ ДІЯЛЬНОСТІ ПІДПРИЄМСТВ

TIME DESCRIPTION OF ECONOMIC REFORMS ◽

10.32620/cher.2021.1.09 ◽

2021 ◽

pp. 74-81

Author(s):

Олена Сергіївна Юрченко

Keyword(s):

Financial Reporting ◽

Information Needs ◽

Accounting Standards ◽

Financial Statements ◽

Fair Value ◽

The Real ◽

Real Value ◽

The Impact ◽

Accounting Policy

Formulation of the problem. Based on the study, the prerequisites, features and components of the formation of accounting policies in the context of business continuity are revealed. The purpose of the article is to substantiate the theoretical and methodological and organizational provisions of accounting policy formation in the context of the implementation of the concept of continuity. The object of research is the process of formation of accounting policy and its impact on the quality of corporate financial reporting information. Methods used in the study: scientific knowledge, method of generalization, comparison, logical - meaningful, methods of induction and deduction. The main hypothesis is that the formation of accounting policies aimed at determining the regulations of accounting and reporting from the standpoint of reflecting complete and reliable information about the real value of assets and liabilities will help reconcile the interests of all stakeholders. Presenting main material. The article identifies the prerequisites, directions and elements of the formation of accounting policies on the principle of continuity of enterprises. Provisions on the development of theoretical and methodological foundations for the formation of accounting policies of enterprises on the basis of risk-oriented approach are revealed. The necessity of valuation of assets and liabilities according to the criteria: fair, discounted and market value of enterprises is substantiated and the methodological support of valuation of financial instruments in accounting is revealed. Originality and practical significance are proposals for the formation of methodological and organizational support and recommendations for the measurement of assets and liabilities at fair value in order to improve the quality of financial statements. Research findings. The formation of accounting policy in the context of the principle of continuity is based on the requirements of International Accounting Standards and National Accounting Standards and depends on the needs of management, methods and techniques of accounting. In the process of developing an accounting policy, it is necessary to take into account the information needs of various stakeholders to disclose information in corporate financial statements. The introduction of theoretical and methodological provisions for the formation of elements of accounting policy on the principle of continuity will meet the information needs of different users, improve the quality of financial reporting and assess the impact of accounting policies on the real value of enterprises in the future.

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Conceptual framework and measurement: A survey on the international debate

Corporate Ownership and Control ◽

10.22495/cocv12i4p2 ◽

2015 ◽

Vol 12 (4) ◽

pp. 24-37

Author(s):

Giusy Guzzo ◽

Massimo Costa

Keyword(s):

Conceptual Framework ◽

Financial Reporting ◽

Cost Accounting ◽

Fair Value ◽

Policy Implications ◽

Mixed System ◽

Fair Value Accounting ◽

International Debate ◽

Historical Cost ◽

Historical Cost Accounting

In response to the ‘2011 Agenda Consultation’, the IASB launched in July 2013 a call for a new Discussion Paper on the ‘Conceptual Framework for Financial Reporting’. This article aims to offer a contribution to the debate on the effectiveness of the theme of ‘Measurement’, by investigating the use of the current evaluation models in the literature and practice of Financial Reporting. The article proposes at first a historical survey both of the international debate on Fair Value Accounting vs. Historical Cost Accounting and of the Italian theories on the valuation. Later the paper proposes some considerations about the key questions related to Measurement and the possible policy implications of the main research finding, by conceptualising a ‘mixed’ system combining fair value Accounting and historical cost Accounting to try giving a more rational base to the financial reports.

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A Stakeholder’s Perspective on the Implications of IFRS and Fair Value Accounting on Valuation of Securities

Earth Common Journal ◽

10.31542/j.ecj.124 ◽

2013 ◽

Vol 3 (2) ◽

Author(s):

Glynis Milne and Dr. Eloisa Perez

Keyword(s):

Financial Reporting ◽

Market Value ◽

Fair Value ◽

Financial Instruments ◽

Fair Value Accounting ◽

Optimal Method ◽

Historical Cost ◽

Financial Reporting Standards ◽

Illiquid Markets ◽

Fair Market Value

Due to the complexity of modern financial instruments, accurate valuation can prove difficult even in optimal market conditions. Traditionally International Financial Reporting Standards (IFRS) have allowed securities to be valued based on their historical cost, which results in financial instruments being held on the books at the initial cost paid, until the point at which they are sold. However, this practice may be viewed as problematic when the market value of the financial instrument has not appreciated. Furthermore, market valuation becomes even more difficult to substantiate in illiquid markets, as it may oftentimes be difficult to secure a buyer at any price. Opponents of the historical cost methodology argue that in these circumstances it is unreasonable to allow firms to continue to hold their financial instruments at historical cost, and advocate for a valuation framework that requires the holders of securities to mark their book value to the best estimate of fair market value available. This viewpoint is countered by those who believe that in illiquid markets or markets in crisis, marking to market value is unfair as no functional market exists. In light of the subprime mortgage crisis the new iteration of IFRS requires the use of fair value accounting and marking to market for investment products of all types, with the exception of those held to maturity (bonds). Through a review of current literature, we sought to determine the optimal method for valuation of investment products. Our goal was to determine a reliable and representationally faithful method of valuation that will balance the needs and requirements of all stakeholders and provide transparency in accounting.

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Fair Value and Abnormal Audit Fees

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v8i3.13453 ◽

2018 ◽

Vol 8 (3) ◽

pp. 91

Author(s):

Tatyana S Ryabova ◽

Keji Chen ◽

Gary Taylor ◽

Rishma Vedd

Keyword(s):

Financial Reporting ◽

Reporting Quality ◽

Audit Fees ◽

Fair Value ◽

Preliminary Evidence ◽

Financial Reporting Quality ◽

Accounting System ◽

Fair Value Accounting ◽

Historical Cost ◽

Cost Accounting System

Our study compares the financial reporting quality between a principles-based (i.e., fair value) and a rules-based (i.e., historical cost) accounting system. We explore a non-market based proxy of financial reporting quality: abnormal or unexplained audit fees. Utilizing a sample of European Union firms, we find that firms using a fair value accounting system have a lower level of abnormal audit fees. This result provides preliminary evidence that a fair value accounting system provides higher financial reporting quality.

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LABOUR MARKET REFORM: GENERAL TRENDS, EXISTING CHALLENGES, DIRECTIONS OF ADVISORY SUPPORT

The institute of accounting, control and analysis in the globalization circumstances ◽

10.35774/ibo2021.01-02.050 ◽

2021 ◽

pp. 50-59

Author(s):

Yuriy Bakun ◽

Mykhaylo Ksenofontov ◽

Lyudmyla Dudnik

Keyword(s):

Financial Reporting ◽

Balance Sheet ◽

Financial Statements ◽

Fair Value ◽

Fundamental Principle ◽

The Real ◽

Historical Cost ◽

Current Accounting ◽

Financial Position ◽

The Difference

Introduction. The article describes the concept of valuation of assets, liabilities and capital, as well as the presentation of the information received in the accounting and financial statements. Methods. Methods of structural and logical analysis, comparison and generalization of requirements of national and international accounting standards and current legislation are used in this article. Results. The economic content of the assessment of objects at the reporting date as an important methodological tool of accounting is in-depth. The principal difference between the fundamental principle of accounting - monetary valuation and evaluation as a procedure performed for the purpose of obtaining the real (fair) value of the property of the enterprise as of the reporting date is set out. The expediency of using historical value in current accounting and fair value is substantiated - when the information about the property of the enterprise in the financial statements is displayed. It has been proved that the assessment as one of the fundamental principles of accounting and assessment as a procedure that is carried out in order to obtain the real (fair) value of the property, liabilities and capital of the enterprise as of the reporting date should be distinguished. The expediency of using historical value in current accounting and fair value has been substantiated - when the information about the property of the enterprise in the financial statements is displayed. The assessment has been designated as the principle of accounting and as a procedure performed to establish the fair (fair) value of the property, liabilities and capital of the enterprise at the reporting date. To do this, the balance sheet proposes to reflect the results of their accounting for historical cost, and in the statement of financial position present information about the financial position, taking into account the fair value of assets, liabilities and equity as of the reporting date. Discussion. The difference between the indicators of these reports is recommended to be presented in the notes, accordingly, it will provide interested parties with reliable information about the financial position and will give reasons to recognize the extent to which the revalued methods of revaluation of assets, liabilities, capital and management effectiveness are used. Keywords: accounting, assessment, financial reporting, accounting principles, fair value, accounting procedure.

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Fair Value Accounting vs. Historical Cost Accounting

Review of Business Information Systems (RBIS) ◽

10.19030/rbis.v17i1.7579 ◽

2012 ◽

Vol 17 (1) ◽

pp. 1-6

Author(s):

Paul Jaijairam

Keyword(s):

Balance Sheet ◽

Financial Statements ◽

Cost Accounting ◽

Fair Value ◽

Fair Value Accounting ◽

Historical Cost ◽

Income Statement ◽

Accounting Reports ◽

The Impact ◽

Historical Cost Accounting

This paper reviews fair value accounting method relative to historical cost accounting. Although both methods are widely used by entities in computing their income and financial positions, there is controversy over superiority. Historical cost accounting reports assets and liabilities at the initial price they were exchanged for at the time of the transaction. Conversely, fair value accounting quotes the prevailing price in the market. Nevertheless, while both methods of accounting affect financial statements, the impact of fair value accounting on the balance sheet and income statement is extreme due to the potential volatility of the method. Fair value accounting is deemed superior when compared to historical cost accounting because it reflects the current situation in the market whereas the later is based on the past. In addition, in relative terms, fair value accounting provides users with more current financial information and visibility.

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Measurement in Financial Reporting: The Need for Concepts

Accounting Horizons ◽

10.2308/acch-50689 ◽

2013 ◽

Vol 28 (2) ◽

pp. 331-352 ◽

Cited By ~ 42

Author(s):

Mary E. Barth

Keyword(s):

Financial Reporting ◽

Financial Statements ◽

Fair Value ◽

Historical Cost ◽

Accounting Measurement ◽

Starting Point ◽

Subsequent Measurement ◽

Alternative Measurement ◽

Definition Of ◽

Value Measurement

SYNOPSIS The Conceptual Framework neither specifies the objective or definition of accounting measurement, nor provides a conceptual basis for choosing among alternative measurement bases. This paper offers a starting point for developing measurement concepts based on existing Framework concepts, including the objective of financial reporting, the qualitative characteristics of useful financial information, and the definitions of assets and liabilities. The paper focuses on subsequent measurement of individual assets and liabilities and concludes that fair value measurement is more consistent with existing concepts than either modified or unmodified historical cost. Although unmodified historical cost is consistent with some concepts, modified historical cost—which is widely used today—largely is not. Also, aggregate amounts, such as total assets and total liabilities based on modified or unmodified historical cost, lack meaning. Because financial statements include such aggregate amounts and changes in amounts of individual assets and liabilities determine comprehensive income, measurement concepts also need to contemplate these measurements.

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Understanding Practice and Institutions: A Historical Perspective

Accounting Horizons ◽

10.2308/acch-51498 ◽

2016 ◽

Vol 30 (3) ◽

pp. 409-423 ◽

Cited By ~ 16

Author(s):

Ross L. Watts ◽

Luo Zuo

Keyword(s):

Corporate Governance ◽

Financial Reporting ◽

Fair Value ◽

Information Control ◽

Governance Mechanism ◽

Fair Value Accounting ◽

Current State ◽

Net Assets ◽

Anglo American ◽

Historical Accounts

SYNOPSIS This paper explains how and why Anglo-American accounting and auditing, along with corporate governance and capital markets, evolved over many centuries in response to changes in market forces and technology. We first trace the development of practices that were included in U.S. corporate governance (including accounting and auditing) before the 1930s. We then describe the nature and effect of the increase in U.S. regulation from the 1930s and the development of fair value accounting. Finally, we give an assessment of the current state of accounting, auditing, and corporate governance. Our historical accounts suggest that the approach to accounting and financial reporting is more consistent with stewardship (care of net assets) than an attempt to value the firm, and that conservatism (prudence) is a critical information control and governance mechanism. We echo the U.K. Financial Reporting Council's call on standard setters to reintroduce an explicit reference to conservatism (prudence) into the Conceptual Framework for financial reporting. JEL Classifications: M41; M42; M48; N20.

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Fair Value Accounting: A Historical Review Of The Most Controversial Accounting Issue In Decades

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i4.705 ◽

2010 ◽

Vol 8 (4) ◽

Cited By ~ 5

Author(s):

David J. Emerson ◽

Khondkar E. Karim ◽

Robert W. Rutledge

Keyword(s):

Financial Reporting ◽

Historical Review ◽

Financial Statements ◽

Fair Value ◽

Financial Statement ◽

Fair Value Accounting ◽

Critical Elements ◽

History Of ◽

Regulatory Bodies ◽

Fair Value Measurements

Historically, there have been many disputes in the area of corporate financial reporting.  However, one of the primary issues of disagreement between practitioners, regulators, and theoreticians is that of valuation of financial statement components.  The latest twist in the evolution of valuation is the push for (and against) the use of a fair value approach.  The purpose of this paper is to examine the history and evolution of how the most critical elements of an entity’s financial statements are valued.  We provide a history of valuation of financial statement components, and identify the issues involved.  Further, we examine the criticisms of actions taken by the regulatory bodies in their efforts to standardize and advance accounting practices.  Particularly, we focus on the evolution of fair value measurements.  Arguments both for and against the implementation of fair value accounting are provided.

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