Fair Value Reporting

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Fair Value Reporting

Executive Summary

The International Accounting Standards Board is in charge of the production of International Financial Reporting Standards used in various countries for uniformity and conformity to particular guidelines of accounting. In Australia, the fair value and sets established from the year 2011 enable a framework that is used in measuring of the financial and non-financial assets. The necessary amendments encountered in the declaration of not-for-profit entities are not contained. Individual countries can either take up the IASB protocols given or rather; use convergence in deriving of its guidelines used for fair value measurement. In the analysis of the concerns raised through the concepts and use of fair value, this report highlights the purposes of fair value measurement, studies the FASB and IASB harmonization, discusses the amendments, as well as practices of fair value reporting in Australia. Methods used include relevance evaluation of the standards in place, determination of the fair practices and analysis of them with ideal findings and recommendations.

Relevant Accounting Standards

The purpose of issuing Australian equivalent of IFRS as AASB 13 Fair Value Measurement indicates the usage of the new standard specificities, when they are required and permitted as techniques for measurement (Australian Accounting Standards Board 1). According to its use, there are no new requirements. It also provides a clear objective in the technique modalities for application. Enhanced disclosures are also provided whereas consistent measurement framework is enabled. The purpose is to serve the operative ideals for the financial periods provided with early adoption and specific use. In essence, the issuance of equivalents specifies how the measurements should apply to the existing standards of the IFRS.

Equivalent of IFRS as AASB 13 Fair Value Measurement is vital for the superannuation of the fund regulators, submissions, and current issues on standards of auditing especially the self-managed categories. It enables quality review programs on the guidelines of financial reporting issues on the existing standards of accounting (Financial Accounting Standards Board 1). The disclosures of fair value measurements as effected in the country pertain to the equivalents of IFRS in relation to the standards set by AASB. It gives the instruments for the implications on complexities affecting the accounting practices as well as the reduced disclosure regimes in the country’s accounting standards.

The jurisdiction of standard setter’s process and their endorsements are provided by the issuance of Australian equivalent of IFRS as AASB 13 Fair Value Measurement. It helps determine their convergence into the set national standards either partially or allowing the complete use. It details the multi-step process into categorization of Australian accounting standards and subsequent enrolling of new categories (Financial Accounting Standards Board 1). It streamlines the methods of implementation and contrasting of the adopted compliance with the IFRS. Another purpose of the issuance of the Australian equivalent of IFRS as AASB 13 Fair Value Measurement is recognition of the effectiveness of the standards without abdicating responsibilities and jurisdictions.

Roles of FASB and IASB in Harmonization

The FASB and IASB are responsible for the harmonization and convergence of the accounting standards through the paths taken to improve them for the benefit of potential and present investors, creditors, as well as financial statements (Financial Accounting Standards Board 1). Both boards ensure that there is reduced cost in the preparation of the financial statements by the respective bodies and increasing the efficiency in capital markets worldwide. They ensure that there is development of a unified system of cross-border international accounting and high quality standards. The standards are for the domestic and international acceptance in a unified and generally accepted mechanism.

Through collaboration between the two bodies, the generally accepted principles are consolidated with the international financial reporting standards in ways meant to minimize or eliminate all the differences between them. Under the memorandum of understanding, cooperation and collaboration ensures streamlined joint-standard settings for the practice and advisory avenues for the harmonization criteria (Zeff and Nobes 179). The respective role of each board epitomizes the initiation of new projects with interests in improvement of participation in the global capital markets and the influence in financial reporting to the interested parties. It ensures a system of fair value measurement, business combinations, and non-controlling interests.

The FASB and IASB determine the revenue recognition under the guidance of GAAP and IFRS. Both boards harmonize the converged nature, uncertainty, and timing of the customers’ revenue contracts and financial statements. Both boards harmonize the appropriate standards used in protection of the interest of the public as well as those of investors. The convergence role seeks to provide the support on internationalization of standards across the borders in matters of capital flows and interests of a global scale. The role is meant to phase out the nationalization of the identified initiatives into international standards in matters of principle to the Fair Value Measurement.

Major Amendments of AASB 13

The amendments by AASB 13 to other accounting standards in relation to the fair value affect the related party disclosures. It affects the removal of individual key management disclosure of personnel under the corporations act in disclosing of the entities (Chea 4). A simple approach for the measurement and recognition of the gains and losses is used for the future references. Under the amendments, they are recognized in the period of their occurrences. The planned returns on assets are counted as comprehensive income. As regards the planned assets, major assumptions listed under the sensitivity, associated risks affect the termination of benefits, and their expenses, which are all included in the financial statements.

The amendments cover the standards arising from the fair value measurement. From the project to ensure consistency, the definition aligns the price used in selling of an asset. It also covers the orderly transaction of a liability between the measurement date and participants in the market. It states that the value does not factor the asset intentions on specific entity (Zyla 16). The amendment does not factor holding or selling of an asset. The principal market identification is given by the requirement of the non-financial assets in terms of value as well as the best use. The fair value hierarchy is then used to determine their disclosure. The previous hierarchy is then enabled for fair value measurement.

Consolidation requirements under the previous standards are replaced by the amended and the separate financial statements. A broader concept of control was introduced, includes the application guidance in detail. The no-for-profit standards are paired with public sector in the amendments as concerns mandatory application and the reporting periods in an annual basis. The non-monetary contributions are altered as per the definition of the ventures and control concepts. The joint controls are under unanimous consent and the joint operations used in the controlled assets in measurement of fair value. Previously, consolidation on proportions was available while under the amendments, equity method is enabled in the current documentation.

The amendments of AAB 13 determine the consistency enabled through fair value measurement and expanded inputs. The effect is translated to the measurement of earnings over a specific period. It also affects the literature of accounting and eliminating of differences encountered in the general applied accounting principles. The transition adjustments are made according to the fiscal year of the initial application as a cumulative adjustment effect. The three levels of valuation techniques are then categorized in an unadjusted input as per highest priority in the active markets (Laux and Leuz 97). The active markets in turn determine the quoted prices, which are ideal for liabilities or identical assets.

Fair Value Reporting Practices

In the past, fair value reporting rested on the historical accounting in books. It affected the manner in which investment choices and decisions in management were carried out. The consequences were translated on the aggregate activities of the economy. The historical fair value accounting was heralded as reliable and conservative. In some of the counter-arguments, the Wall Street crash, which occurred in 1929, is attributed to some of the dubious practices of fair value accounting (Laux and Leuz 94). Between the periods of 1930 to the year 1970, it was banned virtually. It was revived in the financial crisis of 2008. Its metrics have been signaled to proliferation of the times that defined its course.

Fair value has been blamed for differentiation in acceleration of markdowns over the years, calculation of executive bonuses on securitized assets, and the rise in asset prices. Throughout history, the relative merits on fair value and its cost pioneered accounting research. It provided reliable measures with its adoption according to the generally accepted accounting principles and standards. From the inception in the year 1973, backgrounds of the standards used enabled the reliability and relevance of fair value reporting to be scrutinized. It helped change the traditional view and opinions. The original standard setters affected the investment management and banking for example. With its adoption in more than a hundred countries in the world, its extensive use has strengthened financial accounting.

The reliability of fair value reporting in the future determines the relevance and reliability of financial accounting and its increased justification (Dobler 3). The substantive controls of fair value reporting are vital for the consolidation of in-house-balance sheets of financial institutions and the risk management requirements. The familiarity is essential in the public financial standards of reporting. In addition, profits that encompass generally accepted accounting principles would be responsible for marking the gains and recognition particularly in cases of rise in asset prices. Financial services will also reap better rewards within the regime of fair value, for example, in the profit numbers, calculation of managerial bonuses and capital gains.

The use of fair value will hold potential boosts to revenue bases and sources of financial institutions. The streamlined influence on securities and financial exchanges will have to be ensured on the management of assets, as standard practice will be involved (Jones 22). The benchmark used in the reporting will be implemented in order to avoid cases of conflicts of interest and misappropriation in compliance and controls. Due to the reliability and relevance enforcement, the standards and practice will be in effect for efficiency valuation and determination of performance. An added advantage is realized with the increased transparency avenues gained from the practices of valuation, organization and the different entities as regards financial accounting.

Index on Fair Value Measurement

The Australian Agricultural Company’s financial statements as of March 2014 show that the total cash and short-term investments were at 69.2 million Australian dollars compared to the receivables at 12.0 million Australian dollars with the total capital decreased by 27.69% in the last fiscal year. The total current assets were at 256.1 million Australian dollars while the total assets amounted to 1,100.1 million dollars. The total revenues recorded were at 316.8 million Australian dollars, while the operating income was at negative 148.8 million dollars. The bottom line recorded a profit in the net loss from 80.7 million Australian dollars to 39.9 million Australian dollar, representing a rise by 40.8 million.

According to the regulations of financial reporting, the Australian Agricultural Company released its disclosed entities, registered schemes and the relevant financial statements as per the corporations act. The use of the going concern assumption was enabled in calculation and presentation of insurance settlements, impairment of goodwill as well as depreciation and amortization in total. The falling revenues have had a significant impact on the bottom line loss and the growth of the company. The interest and investment income aligned with the reporting entity in order to determine the company’s allocation of resources and the basis of evaluation. It has enabled the company to reduce the loss operation cost as evidenced in the bottom line loss operational value.

Opinion

In the expression of the intangible assets, the separable and identifiable assets were clearly expressed especially with the goodwill distinction. However, there was lack of the credit ratings in the outstanding entities as well as capital markets for the fiscal year that ended in March 2014. In addition, the commercial substance should have been noted through the received on reliable measure. A marked differential reporting was not achieved as well as the materiality. With the one decimal point expression in the estimates, changes in the estimates and errors was less significant especially to the million dollar figures. As far as the intangible assets and financial instruments were concerned, the level achieved in the statements was satisfactory.

The fair value practices on the financial instruments applied in the company should emphasize the robust management of risks within the firm. The net loss operational recordings should increase the need for fair value measurements at all levels. The supervisory review process and enhancement of standard accounting process should provide transparency and reliability. Strong governance and valuations will thus be enabled for the greater need of the stakeholders involved, both internal and external. The operating expenses can be decreased with a measured total on the non-operating and unusual items categories. The three different approaches of market, income, and cost should influence the hierarchy of the company’s fair value premise.

Conclusion

Fair value reporting is an essential accounting practice, which influences the valuation of a liability or asset in which market price is not able to be determined. Subjective factors used in the process include risk characteristics, perceived utility of the individual and the return on, and cost of capital. Objective factors include the supply versus demand, actual utility, and costs attributed to acquisition, distribution, and production. The International Accounting Standards Board is responsible for the production of International Financial Reporting Standards used in various countries for uniformity and conformity to particular guidelines of accounting. Therefore, companies should actively use the fair value reporting measurements along with the generally accepted accounting principles to determine the value of their market assets.

Works Cited:

Australian Accounting Standards Board. The Standard Setting Process. Australian Government. Web. December 17, 2014. http://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx

Chea, Ashford. “Fair Value Accounting: Its Impacts on Financial Reporting and how it can be enhanced to Provide More Clarity and Reliability of Information for Users of Financial Statements.” International Journal of Business and Social Science Vol.2 No. 20 (2011). 1-8. Print.

Dobler, Michael. “Rethinking Revenue Recognition- the Case of Construction Contracts under International Financial Reporting Standards.” International Journal of Revenue Management Vol.2 No.1 (2008): 1-22. Print.

Financial Accounting Standards Board. International Convergence of Accounting Standards. Web. December 17, 2014. http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264

Jones, Michael. Accounting. Chichester, England: Wiley, 2006. Print.

Laux, Christian and Christian Leuz. “Did Fair Value Accounting Contribute to the Financial Crisis?” Journal of Economic Perspective Vol. 24. No. 1 (2010): 93-118. Print.

Zeff, Stephen and Christopher Nobes. “Has Australia (or any other Jurisdiction) Adopted IFRS?” Australian Accounting Review Vol.20. No.53 Issue 2 (2010): 178-185. Print.

Zyla, Mark L. Fair Value Measurements: Practical Guidance and Implementation. Hoboken, N.J: John Wiley & Sons, 2010. Print.

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