Importance of Fair Value Accounting in Corporate Reporting

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ACC202 Corporate Accounting

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Part A: Essay
Introduction
The essay is developed for demonstrating the importance of using an appropriate
approach of measurement for development and presentation of the financial information in a
company accounts. In this context, the relevance of fair value accounting in the contemporary
world of business is being emphasized along with its applicability in the wide range of private
and public sector organizations in this essay. Lastly, it also evaluates the impact of fair value
accounting approach on the occurrence of financial crisis such as subprime or any other crisis.
Relevance of Fair Value Accounting in Corporate Reporting
The financial reporting measurement approaches adopted by a company during
development of its annual accounts has a significant impact on determining its financial position.
This is because it leads in determining the value of financial elements of a company such as
assets, liabilities and equity. Thus, it can be said that measurement approach selected has a direct
impact on the economic performance of a company and so it is highly essential to adopt the use
of an adequate measurement approach for preparation of financial information to ensure its
reliability and relevance. The accountants traditionally adopted the use of historical method of
accounting for reporting of the financial information. The method has required the reporting of
all the elements of financial statements on the original cost at the time of its acquisition.
However, it has received criticism owing to its limited relevancy as it relatively ignores the
current market value of an asset and thus does not presents the actual value of the different
financial elements (Laux and Leuz, 2009).
As such, the accounting bodies have placed emphasis on adopting the use of alternative
methods of accounting for reporting of financial information that enables in overcoming the
drawbacks associated with the historical method of accounting. The use of fair value accounting
approach has gained increased importance in the contemporary world as it enables in recording
the value of an asset or liability on the basis of market price. It enables in improving the accuracy
and relevancy of the accounting information by reflecting the actual value of different financial
elements by taking into account all the market trends and fluctuations. The International

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Financial Reporting Standards (IFRS) adopted by the Australian business entities have adopted
the use of fair value of accounting (Lodh, 2018).
The Australian Accounting Standards’ Board (AASB) has directed all its ASX public
listed entities to adopt the use of fair value accounting approaches. This is done for improving
the usefulness of financial information in decision-making and providing accurate information to
the stakeholders by depicting the market value of the business. However, the major limitation
associated with its wide adoption among Australia financial reporting system such as in the small
and private sector organizations is the issue of costs. This is because it requires the specialists for
performing valuations as per the AASB 13 standard that has directed to adopt the use of fair
value approach to measure the value of financial assets and liabilities (CPA Australia, 2015). In
addition to this, the lack of proper guidance and support from the top management of wide
number of companies within Australia is leading to restricting its wide adoption. As such, the
standard is largely being applied by the companies operating within financial services, property
and plant, manufacturing, real estate and insurance sector that require reporting of financial
assets and liabilities value as per the market value to determine their actual economic position
before the end-seers (Whittington, 2008).
Also, the fair value accounting suffers from the criticism of having limited reliability as
the market price fluctuates as per the economic context of a country. The same has occurred
during the subprime mortgage meltdown and the economic and financial analysts have regarded
the fair value accounting approach to be the main reason responsible for the fraud occurrence.
This is because the decline in the market prices leads to reduction in the bank capital and forced
them to sell their assets. The illiquid market caused the assets to be valued at a lower amount due
to inactivity within the market. The market for an asset valued at fair prices has become illiquid
and this caused the issue of asset values that are reported on the balance sheet to be significantly
higher as compared to which they could be sold. Thus, less transparency about the potential
losses and the increasing in the leverage period has resulted in the occurrence of financial crisis
such as subprime meltdown with the use of fair value accounting. Therefore, the accounting
bodies after the occurrence of global financial crisis are emphasizing towards adoption of a
mixed method of measurement which incorporates the use of both historic and fair value for
financial reporting (Plamrose, 2009).