Including Estimates of the Future in Today's Financial Statements

This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard-setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard-setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognized. Disclosures in the notes can help users understand recognized estimates and can provide information about unrecognized estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's income, but such a measure arguably provides better information for making economic decisions.

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Using Fair Value Earnings to Assess Firm Value

Accounting Horizons ◽

10.2308/acch-52156 ◽

2018 ◽

Vol 32 (4) ◽

pp. 49-58 ◽

Cited By ~ 2

Author(s):

Mary E. Barth ◽

Wayne R. Landsman

Keyword(s):

Financial Reporting ◽

Firm Value ◽

Fair Value ◽

Cash Flows ◽

Financial Statement ◽

Fair Value Accounting ◽

Economic Decisions ◽

The Subject

SYNOPSIS Whether fair value accounting should be used in financial reporting has been the subject of debate for many years. A key dimension to this debate is whether fair value earnings can provide information to financial statement users that is helpful in making their economic decisions. A criticism of fair value accounting is the contention that fair value earnings simply reflects “shocks” to value, and thus cannot be used to assess firm value. We show how fair value earnings can be disaggregated into components that can be used to assess firm value, as well as components that provide information about various types to shocks to value, e.g., effects of changes in expected cash flows.

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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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Trust in Fair Value Accounting: Evidence from the Field

Journal of International Accounting Research ◽

10.2308/jiar-2021-034 ◽

2021 ◽

Author(s):

Clarence Goh ◽

Chu Yeong Lim ◽

Jeffrey Ng ◽

Gary Pan ◽

Kevin Ow Yong

Keyword(s):

Conceptual Framework ◽

Financial Reporting ◽

Multivariate Regression ◽

Reasoned Action ◽

Positive Association ◽

Financial Statements ◽

Fair Value ◽

Positive Outcomes ◽

Fair Value Accounting ◽

High Confidence

We survey stakeholders in the financial reporting process to examine trust in fair value accounting. Though respondents demonstrate high confidence in financial statements, they believe that fair value accounting decreases trust in financial reporting and that preparing fair value numbers is costly but beneficial. They also strongly believe in the Conceptual Framework underlying standard setting. Using multivariate regression analyses, we find that perceiving fair value accounting as beneficial is positively associated with trust in it, consistent with the theory of reasoned action that people engage in behavior (e.g., trust) based on expected positive outcomes of that behavior. We find that this positive association increases with stronger beliefs in the Conceptual Framework. Our paper contributes to the fair value literature by providing general insights on trust in fair value accounting and a specific and novel assessment of how the perceived benefits of fair value accounting increase stakeholders’ trust in it.

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Fair Value Concept Specifics in Financial Reporting and Auditing

Economic Themes ◽

10.1515/ethemes-2015-0008 ◽

2015 ◽

Vol 53 (1) ◽

pp. 119-141

Author(s):

Bojan Rupić ◽

Ljiljana Bonić

Keyword(s):

Financial Reporting ◽

Information Needs ◽

Technological Development ◽

Financial Statements ◽

Fair Value ◽

Fair Value Accounting ◽

Historical Cost ◽

Modern Business ◽

Net Assets ◽

Value Concept

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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The Relationship between Fair Value Accounting and Presence of Manipulation in Financial Statements

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v4i1.5405 ◽

2014 ◽

Vol 4 (1) ◽

pp. 221

Author(s):

Laith Abdullah Alaryan ◽

Ayman Ahmad Abu Haija ◽

Ali Mahmoud Alrabei

Keyword(s):

Business Ethics ◽

Financial Statements ◽

Fair Value ◽

Policy Implications ◽

Annual Reports ◽

Fair Value Accounting ◽

Before And After ◽

The Face ◽

The Relationship ◽

Number Of Firms

The application of fair value has started early in Jordan, which was a bone of contention among supporters and opponents. This study came to provide empirical evidence on the relationship between fair value and financial manipulation. The study extracted data from 45 companies’ annual reports during a ten-year period (1997- 2006) five years before and after the application of fair value to examine the relationship among the application of fair value accounting and the presence of manipulation in financial statements. The result indicates that the number of firms that manipulated information in the financial statements had increased after applying fair value accounting. The results have policy implications, one of which is that the Jordanian government should either enact new regulations or modify the current regulations in the face of an increasing number of manipulations by firms after the application of fair value accounting. These regulations are needed to increase both the managements’ and accountants’ responsibility towards the firms and to enhance the business ethics of the organization.

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Fair Value Accounting: Implementation Challenges Facing Small and Medium-Sized Entities in the Agricultural Sector

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v8i4.13643 ◽

2018 ◽

Vol 8 (4) ◽

pp. 60

Author(s):

Joseph Kwasi Agyemang ◽

Owusu Acheampong ◽

Wiafe Nti Akenten

Keyword(s):

Financial Reporting ◽

Agricultural Sector ◽

Fair Value ◽

International Standards ◽

Reporting Standards ◽

Fair Value Accounting ◽

Implementation Challenges ◽

Financial Reporting Standards ◽

Regulatory Bodies ◽

Value Reporting

Nowadays, the relevance of fair value in financial reporting is gaining impetus and recent discussions are moving in the trend of full fair value reporting. Small and medium-sized entities are not ignored in this instance. The move to new reporting standards results in various challenges for different interest groups such as auditors, preparers and regulators. The main objective of the study was to establish the fair value implementation challenges facing SMEs in the agricultural sector with evidence from regulatory bodies in Ghana. The study established that there is lack of methodological relationship between existing local laws and IFRS and absence of involvement of regulatory bodies in financial reporting standards setting. In light of these challenges, the study recommends involvement of regulatory bodies in standard setting and consideration should also be given to local laws when setting international standards.

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MENGUPAS PERSOALAN STANDAR AKUNTANSI KEUANGAN - GOODWIL DI BERBAGAI NEGARA : SUATU PENDEKATAN STUDI LITERATUR

Jurnal Riset Akuntansi Dan Bisnis Airlangga ◽

10.31093/jraba.v2i2.48 ◽

2017 ◽

Vol 2 (2) ◽

Author(s):

Deddy Kurniawansyah

Keyword(s):

Research Method ◽

Intangible Assets ◽

Accounting Standards ◽

Financial Statements ◽

Fair Value ◽

Financial Accounting ◽

International Accounting Standards ◽

Fair Value Accounting ◽

Literature Study ◽

Accounting Standard

This literature study explains and describe the development of the concept of goodwill from the perspective of accounting by observing and describing until the development at this time, discusses differences in accounting standards of goodwill applicable in some countries, and explains the things that contradict the goodwill. This research method used qualitative with literature study. The results of this study are in some countries, the concepts and rules on goodwill accounting have undergone various changes, including international accounting standards issued by the IASC. Initially goodwill is capitalized and amortized over no more than 20 years. But, along with the increasing use of fair value accounting in accounting standards, thetreatment for goodwill also experienced a shift that is eliminated by the amortization method is replaced by doing impairment test to goodwill. The results of this study contribute as add to the treasury of financial accounting literature, especially accounting treatment of goodwill as intangible assets in the financial statements of various countries such as Indonesia, America and the England.Keyword :Goodwiil, Impairment, Financial Accounting Standard

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The (un)suitability of fair-value accounting in emerging economies: the case of Vietnam

Journal of Accounting & Organizational Change ◽

10.1108/jaoc-03-2018-0032 ◽

2019 ◽

Vol 15 (2) ◽

pp. 170-197 ◽

Cited By ~ 1

Author(s):

Lisa-Uyen Nguyen

Keyword(s):

Financial Reporting ◽

Institutional Environment ◽

Fair Value ◽

Business Environment ◽

Future Research ◽

Critical Examination ◽

Fair Value Accounting ◽

Structured Interviews ◽

Corporate Misconduct ◽

Content Type

Purpose This study aims to explore the suitability and challenges of implementing fair value accounting (FVA) in Vietnam, an emerging/transitioning economy. While such implementation would enable convergence with International Financial Reporting Standards, standard setters and auditors have raised practical concerns about its adoption. Design/methodology/approach This qualitative study uses semi-structured interviews with regulators and auditors, together with an analysis of two fraud cases that illustrate the business environment in Vietnam. Public, private and capture theories guide the analysis. Findings The business and institutional environment in Vietnam creates several impediments to FVA being effectively implemented and transparently applied. Given the major challenges identified regarding the infrastructure necessary for this valuation system, the premature adoption of FVA may become a catalyst for corporate misconduct. Research limitations/implications The findings are derived from data aggregated from two fraud cases and interviews, and as such, the results may not be generalisable to other settings. However, these findings may inform future research, particularly after the Ministry of Finance provides further guidance on the use of FVA in Vietnam. Practical implications A timely and critical examination of the challenges of implementing FVA in a transitioning economy is provided, and the two fraud cases reveal the complexities of the business environment in Vietnam. Originality/value This research gives voice to the tensions that developing countries are confronting as they seek to balance external pressures with internal constraints. The introduction of an assemblage of three theoretical lenses enables insights into contemporary issues associated with applying FVA in such settings.

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Post-implementation challenges of fair value measurement (IFRS 13): some empirical evidence

African Journal of Economic and Management Studies ◽

10.1108/ajems-05-2019-0183 ◽

2020 ◽

Vol 11 (4) ◽

pp. 587-607

Author(s):

Babajide Oyewo

Keyword(s):

Financial Reporting ◽

Market Price ◽

Fair Value ◽

Economic Benefits ◽

Reporting Standard ◽

International Financial Reporting Standard ◽

Financial Reports ◽

Content Type ◽

Audit Firm ◽

Implementation Challenges

PurposeConsequent on the widespread of fair value (FV) accounting with the coming into effect of International Financial Reporting Standard (IFRS) 13, this study investigated the post-implementation challenges of FV measurement from the perspective of auditors in Nigeria.Design/methodology/approachData collection was through a structured-questionnaire administered on auditors from diverse audit firm backgrounds in terms of size, international affiliation and global presence. Statistical techniques such as cluster analysis, factor analysis and ANOVA were applied to analyse data obtained from 277 respondents.FindingsIt was observed that the severest challenge of FV measurement bothers on the paucity of information for valuation of items. The magnitude of the challenges of applying FV measurement in various industry sectors appears similar. Although audit firm attributes affect perception on the challenges, there is concurrence among auditors that manipulation of values of assets/liabilities with no market price during estimation, leveraging on non-availability of market information on assets/liabilities by managers to manipulate financial statements, inappropriateness/non-compliance of valuation methods with IFRS 13, and low level of awareness among preparers of financial reports are notable post-implementation challenges of FV measurement.Practical implicationsConsidering that the adoption of IFRS 13 impliedly places responsibilities on countries applying the standard to develop institutional structures that facilitate the valuation of items using FV measurement, it seems the establishment of such apparatus may be a sine qua non for fully realising the socio-economic benefits of applying FV accounting.Originality/valueThe study contributes to knowledge by exposing the practical challenges of FV measurement and accounting estimates typical of a developing country that has fully implemented international accounting standards. Moreover, findings from this study could be compared with the result of investigations conducted in other jurisdictions to gain a deeper and wider insight into the challenges of FV measurement with a view to proffering solutions to the post-implementation challenges of IFRS 13.

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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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