Measurement Issues Fair Value Accounting

Table of Content


Accounting is besides known as the  linguistic communication of concerns ” . Learning this linguistic communication helps in effectual communicating and apprehension of the fiscal operations of administrations. Bing the anchor of any concern, accounting allows directors to do informed determinations and keeps investors abreast of developments taking topographic point in the concern.

Fair value, besides called just monetary value ( in a platitude conflation of the two distinguishable constructs ) , is a construct used in accounting and economic sciences, defined as a rational and indifferent estimation of the possible market monetary value of a good, service, or plus, taking into history such nonsubjective factors as:

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  • acquisition/production/distribution costs, replacing costs, or costs of close replacements
  • existent public-service corporation at a given degree of development of societal productive capableness
  • supply vs. demand ( http: // )

Accounting is a measuring system which is plagued by the being of alternate measuring methods and to day of the month the hunt for the best measuring option still continues.

The IASB Framework defines measuring as follows:

Measurement is the procedure of finding the pecuniary sums at which the elements of the fiscal statements are to be recognized and carried in the balance sheet and income statement. This involved the choice of the peculiar footing of measuring ” ( paragraph 99 ) .

This research will discourse why accounting criterions shifted from historical cost theoretical account to fair value theoretical account.

The IASB defines just value as “ the sum for which an plus could be exchanged between knowing willing parties in an arm ‘s length dealing. In Fiji, knowing willing parties seeking to interchange a whole scope of assets merely does non be ” ( Chand & A ; White, 2009 ) .

Furthermore, merely like other rating methods, just value accounting method besides has advantages and unfavorable judgment associated to this rating attack.

In this research paper Iam besides traveling to look at the function that just value accounting has played in the recent planetary fiscal crisis. Looking at beliing statements which hold Fair value accounting responsible for the crisis or sort it as non a major factor which caused the planetary crisis and its deductions in our market.

Aims of the survey

General Aims:

The recent reappraisal of the Conceptual Framework and alterations to the International Accounting Standards reflect the gradual displacement from the traditional historical cost accounting towards just value measuring.

Specific Aims

  • Identify why accounting criterions have shifted to FVA.
  • Identify the advantages and unfavorable judgments of FVA.
  • Identify the deduction of FVA in Fiji.

Theoretical Underpinnings

Agency Theory

This theory was developed to explicate and foretell the actions of agents and rules. Harmonizing to the bureau theory, the rules entrust their resources to directors who act as agents of the resources. Hence it is besides known as the aˆzstewardship hypothesesaˆY . The premise here is that both the agent and the principal are public-service corporation maximizes whose involvements are non needfully aligned. Under this theory the agents are assumed to be driven by self-interest therefore are more likely to choose those measurement methods that maximize their returns ” ( Godfrey et al, 2006, p665-667 ) .

Harmonizing to this research, the principal-agent struggle is enhanced by historical cost accounting. Historical cost accounting obscures existent economic values and generates hidden militias ” ( International accounting criterions commission, 1994 ) . Fair value accounting, on the other manus, decreases the chief agent struggle by necessitating full revelations and transparence in coverage.

The Positive Accounting Theory ( PAT )

This theory was chiefly developed by Watts and Zimmerman and seeks to foretell and explicate why directors ( and/or comptrollers ) elect to follow peculiar accounting methods in penchant to others ” ( Deegan, 2006, p10 ) .

There are two versions of PAT viz. the timeserving version and the efficient undertaking version. Under the timeserving version directors choose accounting policies for their ain benefit. Under the efficient undertaking version directors choose accounting policies to carry through corporate administration aims of the house. Pat centres around three hypotheses:

  1. The fillip program hypothesis
  2. The debt/equity hypothesis
  3. The political cost hypothesis

Bonus program hypothesis

This hypothesis predicts that if a director is rewarded in footings of a step of public presentation such as accounting net income, that director will try to increase net incomes to the extent that this leads to an addition in addition in his or her fillip ” ( Deegan, 2006, p213 ) .

In the instance of lifting plus values, just value will be taken up whereas historical cost will be opted for when depreciation is less than the autumn in plus just values.

Debt/Equity Hypothesis

Under this hypothesis, the larger a houses debt/equity ratio, the more likely that the director will utilize accounting policies to switch future net incomes to the current period ( higher net net incomes will cut down the chance of proficient default on the debts ) to avoid misdemeanor of their debt contracts.

In the instance of lifting plus values will be taken up whereas historical cost will be opted for when depreciation is less than the autumn in plus just values.

Political cost hypothesis

Harmonizing to this hypothesis, directors have greater inducements to cut down reported net incomes and therefore cut down their perceived ability to bear political costs ” ( Godfrey et al, 2006, p670 ) .

The larger the house, the more likely it is that the director will follow accounting methods and processs that are cheap and that defer reported net incomes from current to future periods.

If just value recognizes a greater decrease on the book value of an plus, in relation to what the current depreciation rate will demo, the directors will choose for the just value accounting. If the assets are lifting in value so, the directors will choose for historical cost because this will go on to compose down the plus ‘s value hence cut downing the net income.

Continuously Contemporary Accounting

This theory was developed by Raymond Chambers which prescribes that all assets should be measured at net market value and that such information is more utile for informed determination doing instead than information based on historical costs, which harmonizing to Chambers may really be misdirecting ” ( Deegan, 2006, p217 ) .

Chambers prescribed that all assets should be recorded at their current hard currency equivalents ( sum expected to be paid by selling the plus ) .

Harmonizing to his attack, if an plus does non hold a current market value so it is to be excluded from the fiscal statements regardless of the value in usage.

Stakeholder Theory

Stakeholder theory is based on fulfilling the demands and demands of the assorted stakeholders ( viz. proprietors, employees, clients and so on ) since they are critical to a house ‘s endurance.

With respects to historical cost accounting it provides direction with abundant chances to pull strings reported accounting figures. In contrast, a just value system is characterized by more revelation and better transparence and better transparence contributes power to stakeholders ” ( Barlev & A ; Haddad, 2003, p333 ) .

The type of information a stakeholder receives depends on the how powerful and influential the stakeholder is.


There are several other theoretical underpinnings that are relevant to explicate the footing of this seminar presentation such as accounting as a Historical Record theory, Accounting as communication-decision information theory, Decision- Usefulness theory of Accounting, Investor theory, Legitimacy theory and others.


The Shift from Historical Cost Accounting to FVA

Standard compositors in the past largely emphasized on historical cost accounting. Under this traditional accounting theoretical account, the income statement, which consequences from fiting an entity ‘s grosss with disbursals during a period of clip, was considered the primary fiscal statement conveying utile information about a company ‘s public presentation and value to stockholders.

The balance sheet was considered a byproduct of the matching procedure, since it contained such classs as prepaid disbursals, unearned grosss, accrued disbursals, and accumulated grosss. Fiscal statements prepared under the historical cost convention were and are still perceived by many today to be dependable, comparatively easy to verify, and straightforward to understand ” ( Cassabona P et Al, 2007, p1 ) .

Historical cost accounting performed good every bit long as a company ‘s assets consisted largely of identifiable touchable assets. With the increased prominence of intangible assets, such as rational capital, human resources, trade name names, engineering progresss, or corporate civilization, this accounting theoretical account resulted in under-valuing and under-recording assets that contributed significantly to the accomplishment of a company ‘s strategic ends and aims.

For illustration, intangible assets that are recorded in the balance sheet — purchased right of first publications, patents, and other legal rights are recorded at historical cost. Other intangible assets, such as trade name assets, assets originating from selling and supplier relationships, and knowledge assets developed from research and development are non recorded at all. Consequently, great disparities between companies ‘ book and market values have been observed, and the users of fiscal statements have pressed for more relevant fair-value information ” ( Cassabona P et Al, 2007, p1 ) .

For the past decennary, to better the decision-making relevancy of fiscal statements, the Financial Accounting Standards Board ( FASB ) has been adding more just value acknowledgment, measuring, and revelation criterions to the by and large accepted accounting rules. The International Accounting Standards Board ( IASB ) follows a similar attack.

As a consequence, a assorted accounting theoretical account has been developed, which is still chiefly based on historical cost but with an of all time increasing application of just value accounting. Consequently, a displacement has occurred in recent old ages towards utilizing the balance sheet as the primary fiscal statement conveying information to stockholders, and the income statement describing economic income as merely the alteration in value over a period of clip ” ( Cassabona P et Al, 2007, p1 ) .

Fair Value Accounting

Merits of FVA

Some of the cardinal grounds why just value accounting benefits investors include:

  • It requires or permits companies to describe sums that are more accurate, seasonably, and comparable than the sums that would be reported under bing alternate accounting attacks, even during utmost market conditions
  • It requires or permits companies to describe sums that are updated on a regular and ongoing footing
  • It limits companies ‘ ability to pull strings their net income because additions and losingss on assets and liabilities are reported in the period they occur, non when they are realized as the consequence of a dealing
  • Additions and losingss ensuing from alterations in just value estimates indicate economic events that companies and investors may happen worthy of extra revelations

Criticisms of FVA

In response to the recognition crunch, some parties ( by and large fiscal establishments ) have criticized just value accounting, including FAS 157 ‘s measurement counsel. Those unfavorable judgments have included:

  • Reported losingss are misdirecting because they are impermanent and will change by reversal as markets return to normal
  • Fair values are hard to gauge and therefore are undependable
  • Reported losingss have adversely affected market monetary values giving farther losingss and increasing the overall hazard of the fiscal system
  • Likely addition in the volatility of income
  • Problems faced by Bankss in adulthood and liquidness transmutation of assets
  • Hinders bank ‘s function as establishments smoothing intertemporal dazes
  • Potential break to market subject caused by the decrease of comparison and dependability of fiscal statements across fiscal establishments
  • Limited dependability of present bank estimations of chances of default ( PDs ) for accounting intents ( Enria et al, 2004 )

Deduction of FVA in Fiji

The acceptance of just value accounting has raised a grade of concern by the FIA members sing its impracticalities and its mutual exclusiveness with the local economic system. The local accounting professional organic structure ( FIA ) agreed in rule on extended acceptance of IFRSs for describing periods get downing on or after 1 January 2007 ” ( Wong, 2004, p. 7 ) .This prompted the execution of just value accounting as prominence shifted to convergence of accounting patterns on an international graduated table.

The costs associated with the acceptance of FVA in Fiji are significant. The IASB defines just value as the sum for which an plus could be exchanged between knowing willing parties in an arm ‘s length dealing ” . In Fiji, knowing willing parties seeking to interchange a whole scope of assets merely does non be ” ( Chand & A ; White, 2009 ) .

This mutual exclusiveness is besides applicable to Fiji ‘s militias and fixed investings. Due to Fiji ‘s thin capital markets the acceptance of just value accounting will take to the extremist revising of balance sheets of entities runing, particularly in the fiscal sector. This leads to goad and undecorated economic costs ” ( Chand & A ; White, 2005 ) .

A local illustration reiterates the statement above:

FNPF ( Fiji National Provident Fund ) , which is our ( Fiji ) compulsory superannuation/pension strategy is required by jurisprudence to keep a lower limit of 50 % of its investing portfolio in authorities securities which are marketable and reported on a held to adulthood footing valued in surplus of $ US 1.15b ( Fiji National Provident Fund, 2004 ) .

By following IAS 26, Accounting and coverage by Defined Benefits Plans, FNPF will be obliged to compose down the value of these investings well. To follow with the legal demand mentioned above i.e. keep a 50 % fund degree of its portfolio in authorities securities, FNPF would be bound to sell of other securities. Furthermore gross revenues would hold to be made at decreased monetary values, which would impair the house ‘s capacity to do pension payments ” ( Chand & A ; White, 2006 pg12 ) .

Furthermore, the demand of IAS16, Property, Plant and Equipment ( 2004 ) for houses to appreciate belongings, works and equipment would in itself have substantial costs. These costs arise in the signifier of engaging valuers for finding the just value of the several belongings, works and equipment.  To worsen affairs, together with the highly high costs of the rating, Fiji lacks a market for the handiness of independent valuers. The local organic structure responsible for the rating of assets ; Fiji Institute of Valuers, has approximately 70 members which does non hold the capableness to transport out informed independent ratings required by IAS 16 ” ( Chand & A ; White, 2006, pg13 ) .

Furthermore, since there is no perfect market that could be used to find just value, the rating procedure would be capable to a high grade of idiosyncratic estimations which can be used for the use of fiscal studies ( if independent valuers are non used ) .


The realistic attack to research was used to roll up this research paper. The undermentioned methods were used:

Interviews and Questionnaires

Questionnaires and interviews were used to garner information from corporate and experienced personal from assorted organisations. Some of the companies which were interviewed are as follows:

  • Mr. Deepak Raj ( Accountant ) – Fiji Sugar Corporation Limited
  • Mr. Ashveen Nandan ( Senior Software Consultant ) – Datec Fiji Limited
  • Mr. Zirus Zuber ( Audit Manager ) – KPMG
  • Ms. Maureen Prasad ( Internal Auditor ) – Punja & A ; Sons Company Limited
  • Mr. Karim ( Auditor ) – Monetary value Waterhouse Peter coopers
  • Ms. Tanya Work ( Customer Services Manager ) – Westpac Banking Corporation

Advantages of carry oning interviews and administering questionnaires to garner information

Large sums of information can be collected from a big figure of people in a short period of clip and in a comparatively cost effectual manner

The consequences of the questionnaires can normally be rapidly and easy quantified by either a research worker or through the usage of a package bundle

The responses are gathered in a standardised manner, so questionnaires are more nonsubjective, surely more so than interviews.

By and large it is comparatively speedy to roll up information utilizing a questionnaire.

The consequences of the questionnaires can normally be rapidly and easy quantified by either a research worker or through the usage of a package bundle

Disadvantages of carry oning interviews and administering questionnaires to garner information

There is no manner to state how true a respondent is being

There is a degree of research worker infliction, intending that when developing the questionnaire, the research worker is doing their ain determinations and premises as to what is and is non of import, therefore they may be losing something that is of importance


Case Study

I carried out a instance survey of the Sugar Research Institute of Fiji ( SRIF ) and looked at the impact that the acceptance of just value accounting posed to the institute. Due to convenience and the readily accessible informations on SRIF in diaries, articles, fiscal studies and publications I limited my range of methodological analysis to archival informations.

The Sugar Research Institute of Fiji has extended degrees of investings in belongings, works and equipment in relation to its runing income. In 2010, SRIF ‘s relentless income was about $ 10m ( SRIF, 2010 ) . Expecting the demand to appreciate utilizing just value accounting as per demand of IAS 16, SRIF obtained quotation marks from independent valuers to find the value of its assets utilizing the just value theoretical account.

After obtaining these quotation marks, SRIF expected the initial cost of following the just value theoretical account to be around $ 1.3m. This was approximately 13 % of its entire revenant income. Meeting the cost of following the just theoretical account required recreation of financess from other indispensable sections such as ACP Funding.

The recreation of financess would hold been a questionable issue from the board members and would hold resulted in a general decrease in the qualitative degree of services provided by the SRIF. SRIF besides had troubles obtaining the appropriate expertness required for the rating procedure as there is n’t an active market for rating work. Furthermore, The Fiji Institute of Valuers ( at that point in clip ) had about 70 members which were presumed to miss the capacity to transport out the independent ratings ” ( Chand & A ; White, 2006, pg. 13 )


Identify why accounting criterions have shifted to FVA

Comparing the findings and analysis with the literature reappraisal, it can be said that they are in line. Some of the major grounds stipulated for the displacement towards just value accounting were due to the demand for more relevant rating of intangible assets such as rational capital, human resources and trade name names which are deriving significance in the accounting profession. Furthermore, another ground was that just value accounting improves determination devising as it ensures more relevant information. Furthermore, due to IFRS balance sheet is now considered a more of import component for investors as they are more concerned about the fiscal place of the concern in a certain point in clip.

Identify the advantages and unfavorable judgments of FVA

Comparing the findings and analysis with the literature reappraisal, we can state that they are in line. Some of the common grounds as to why just rating method of accounting was advantageous were that it provides information which is more accurate, seasonably and comparable. It reports updated sum on regular and ongoing footing. It is utile in determination devising and is crystalline in nature. Furthermore, in the literature reappraisal, another advantageous point was that it besides restricts company ‘s ability to pull strings informations as in just rating theoretical account, additions and losingss of assets and liabilities are reported as they occur and non when they are realized in future.

Furthermore, most of the common grounds for the disadvantages of just value theoretical account were that it is hard to mensurate due to volatile market and fluctuations in net incomes. Besides it is really dearly-won to implement and keep by an entity as they would necessitate to pay high sums to engage advisers and train staff so they can follow this rating method in Fiji. Furthermore, as discussed in the literature reappraisal, some other unfavorable judgment of just value accounting is that information reported is misdirecting as is impermanent and will change by reversal when the market turns to normal. Besides since there are high active markets at that place in developed states, market minutess are volatile and vulnerable to economic conditions, therefore it is undependable.

Identify the deduction of FVA in Fiji

Associating the determination from the analysis with the research it can be assumed that the deductions of utilizing just value are similar to those mentioned in the literature reappraisal. In the instance study it was discovered that Sugar Research Institute of Fiji ( SRIF ) suffered immense costs in order to follow the just value theoretical account which was consistent with the findings from an article “ A review of the influence of globalisation and convergence of accounting criterions in Fiji, “ ( Chand & A ; White, 2006 ) . Furthermore, houses were unable to follow with IFRS criterions since there is no active capital market in the domestic sector. Valuers have had to utilize their subjective estimates based on their accomplishments and expertness.


Research comes with great attempt and clip. Mentioned below are the troubles I encountered while roll uping this research paper:

  • Geographic restraints limited our research to certain commercial country and non Fiji as a whole which led to a little sample size and high exposure to mistakes.
  • The information gathered was excessively wide to do appropriation decisions.
  • Troubles were besides faced when some of the questionnaires distributed to the comptrollers were non returned. If about all had returned, our analysis and findings could hold farther been enhanced.
  • Due to confidentiality issued, houses were hesitating to unwrap information
  • Library research was confined to handiness of limited figure of books, diaries and articles of which most were out-dated, therefore we had to chiefly trust on internet research.



The primary aim of this research was to measure the motivation behind the displacement from historical cost to fair value accounting utilizing Sugar Research Institute of Fiji ( SRIF ) as a local illustration to demo the deduction of utilizing just value in the South Pacific.

The houses shifted from historical cost theoretical account to fair value theoretical account due to dissatisfaction with historical cost in footings of its incapableness in supplying current value of assets, failure to see rising prices, and inability to supply relevant information for investors. When they adopted just value theoretical account it enabled them to take into history all those factors of rating which limited the houses in historical cost theoretical account. Furthermore, just value theoretical account enhances the map of stewardship, it provides complete revelations which are in conformity with the current IFRS and the fiscal information is now more relevant and enhances economic determination devising.

Although just value theoretical account is more preferable than other rating theoretical account, it besides has some unfavorable judgment such as just values are hard to gauge and therefore is undependable and likely addition in the volatility of income. Furthermore, there might be possible break to markets due to decrease in comparison and dependability brought about by just value theoretical account. Last, just value theoretical account is seen as a dearly-won exercising in footings of both clip and resource needed to implement and keep the theoretical account in South Pacific.

There has been a constituent of the profession who argued that just value theoretical account was responsible for the Global Financial Crisis in footings of taking to immense write-off/downs in investings which created a fire sale state of affairs of assets doing full market rating to fall and created a barbarous rhythm. However, there is n’t any serious grounds to back up the claim that just value was the exclusive cause of the fiscal crisis. Others have argued that just value was merely a courier who made the inevitable occur faster because accounting books did non fit the economic world brought approximately by the usage of historical cost while just value established a nexus with market state of affairss and what was portrayed in the accounting books.

The acceptance of FVA in Fiji was by and large met by unfavorable judgment by the local accounting profession and its users. FVA demanded immense execution cost which were in the signifier of consultancy and rating cost. Furthermore, affairs were aggravated by a deficiency of active market for rating. Furthermore, there is no active capital market which prompted subjective appraisal which was prone to use.


Some of the recommendations that I have come up with to help in the acceptance and utilizations of just value accounting ( FVA ) are:

  • Evaluate house ‘s construction and expression at historical informations to find the value of assets when relevant markets do non be.
  • Principles and criterions of FVA should be re-examined in the position of developing realistic and compatible guidelines for covering with less active capital markets.
  • Flexibility of accounting criterions should be enhanced to let for the prudent demand for establishments to keep sufficient capital loss militias as a proviso for expected losingss ensuing from the acceptance of the just value theoretical account. As in the instance survey, SRIF suffered huge disbursals in the acceptance of the FVA theoretical account which was deemed questionable by stockholders and other involvement parties. If Accounting criterions had allowed for the maintained of sufficient capital loss militias, the acceptance costs would hold non caused the degree of disturbance that it did.
  • Allow for an equal degree of development of the rating market necessary to run into up the altering rating demands commanded by the changing criterions.


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