Case Study on Fair Value Accounting

In this document we will discuss about Case Study on Fair Value Accounting and below are the summary points of this document:- Fair Value Measurement as a popular valuation approach for companies to measure their assets and liabilities based on current market price. There are arguments on the effectiveness of fair value accounting for public and private companies, but it provides more transparency in financial statements than historical cost accounting. Fair value accounting has been adopted by many companies and provides relevant and understandable financial information about assets and liabilities. However, fair value accounting has also been criticized for contributing to the world financial crisis by making companies highly leveraged. Overall, fair value accounting brings transparency to financial reporting but has limitations.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Part A: Essay....................................................................................................................................2
Part B: Case Study...........................................................................................................................5
References........................................................................................................................................9

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Part A: Essay
Introduction
Over the years, Fair Value Measurement is regarded as one of the most popular
approaches for the valuation of the assets and liabilities of the companies. Fair value accounting
is the process where the companies measure their assets and liabilities based on the current
market price (Hodder, Hopkins & Schipper, 2014). It can be seen that there are certain major
arguments on the effectiveness of fair value accounting in the measurement of the assets and
liabilities of the public and private companies. The main aim of this essay is the analysis of the
relevance of fair value accounting in the current business world.
Discussion
According to IFRS 13 Fair Value Measurement, Fair Value can be defined as the price
that the companies would receive to sell an asset or paid to transfer a liability in an orderly
transaction between the market participants at the date of measurement (cpaaustralia.com.au,
2019). Thus, the primary use of the fair value accounting is to provide the users of the financial
statements the useful information about the company’s assets and liabilities. However, the
situation has become complicated as there are many arguments on the relevance of the use of fair
value accounting for the private and public corporations (Palea, 2014). While comparing the fair
value accounting with the historical cost accounting, it can be seen that there is more
transparency in the financial statements under the use of fair value accounting as the users can
know the more relevant market prices of the assets and liabilities. However, it can be seen at the
same time that information of the assets and liabilities under historical cost accounting is relevant
to the users only on the date of measurement. This aspect indicates towards the presence of

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relevance as well as reliability in the fair value accounting due to the fact that the users of the
financial statements can obtain the most recent information of the assets and liabilities under fair
value accounting (Magnan, Menini & Parbonetti, 2015).
It can be seen over the years that many private as well as public companies have adopted
the fair value accounting for the valuation of their assets and liabilities. Under the fair value
accounting, the income statements of the private and public corporations provide the users with
the information about the economic income of the firms due to its ability to catch the change in
firms’ value due to the change in the values of assets and liabilities (Lachmann, Stefani &
Wöhrmann, 2015). It implies that the adoption of fair value accounting assists in delivering
relevant and understandable financial information related to the assets and liabilities so that the
key stakeholders of the firms can make correct decisions about the resources and economic
income (Betakova, Hrazdilova-Bockova & Skoda, 2014). This aspect supports the usefulness of
fair value accounting in the public and private companies to deliver the correct value of the
assets and liabilities. In addition, the income statements as per fair value accounting play a
crucial role in providing information on the managements’ performance and risk revelation to the
key stakeholders (Linsmeier, 2013).
Over the years, there have been many arguments on the role of fair value accounting in
the world financial crisis in the presence of the fact that fair value accounting had major
contribution towards the measurement complexities of the assets and liabilities to determine the
subprime position of the companies (Altamuro & Zhang, 2013). Many of the critiques all over
the world argued on the fact that fair value accounting showed the way to the companies to use
debts that made them highly leveraged and this led to the decline of those companies at the time
of economic recession (Francis, Hasan & Wu, 2013). Due to this, there was immense pressure on

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the banks for the valuation of their assets at fire-sale price. In the presence of these aspects, the
valuation of the assets was immensely low which endangered the lending process. All these
aspects indicate towards the aspect that the critical basis of financial reporting was destroyed
with the use of fair value accounting which affected traditionalism, reliability and verifiability of
the financial information of the companies (Goh et al., 2015). All these aspects provide a fair
basis to consider a major role of fair value accounting in the world financial crisis.
Conclusion
The above discussion sheds light on the relevance of fair value accounting in the private
and public corporations by indicating towards its usefulness in providing the more recent
information about the firms’ assets and liabilities. It helps the users of the financial statements in
making correct decisions about the company. At the same time, it can be seen from the above
discussion that the adoption of fair value accounting made the companies highly leveraged at the
time of the world financial crisis. On the overall basis, it can be said that fair value accounting
brings transparency in the financial reporting of the companies.

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Part B: Case Study
This part of the study considers the analysis and evaluation of the fair value accounting of
two ASX listed companies that are Origin Energy and Whitehaven Coal. It needs to be
mentioned that both of these companies operate in the energy sector of Australia. The following
part shows the necessary discussion.
Origin Energy: It can be seen from the 2018 Annual Report of Origin Energy that the company
has adopted a three level hierarchy for the determination of the fair value of the assets and
liabilities (originenergy.com.au, 2019). Level 1 includes the quoted price in the active markets
for the identical financial instruments. Level 2 includes other methods for valuation for that all
inputs having a crucial impact on the fair values are discernible, either directly or indirectly.
Level 3 includes one or more than one key inputs for the financial instruments that are not based
on the visible data of market. The 2018 Annual Report of Origin Energy also states that the
company has used various methods as well as market assumptions on the basis of the present
condition of the market at each of the reporting date (originenergy.com.au, 2019). These are
considered as fair value methodologies that are shown below:

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(Source: originenergy.com.au, 2019)
Hence, it can be seen that Origin Energy has used different fair value methodologies for
the determination of the fair value of different financial instruments. In addition, the main inputs
and assumptions used by the company in the determination of fair value of different financial
instruments are discount rates, credit adjustments, forwards community prices, physical
generation plant variables, liquidity premiums and strike premiums. The company measures
environment schemes and surrenders obligations at fair value. Interest bearing liabilities are also
measured at fair value less transaction cost. The company measures the derivatives at fair value
(originenergy.com.au, 2019).
Whitehaven Coal: As per the 2018 Annual Report of Whitehaven Coal, the company adheres to
the principles and standards of AASB 7 Financial Instruments: Disclosures and it puts the
obligation on the company to disclose the information of fair value measurement by three level

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fair value measurement hierarchies (whitehavencoal.com.au, 2019). In Level 1, Whitehaven Coal
is needed to disclose information on the measurement based on the quoted price in the active
markets the identical classes of assets and liabilities. Level 2 demands the disclosure of the
information on the measurement based on inputs other than quoted price that are observable for
the assets and liabilities. Level 3 demands the disclosure of information on measurement based
on the inputs of the assets and liabilities that are not grounded on observable market data
(whitehavencoal.com.au, 2019). As per the Annual Report 2018, Whitehaven Coal measures
their revenue from the sales of coals at fair value of consideration received. After that, the
company uses fair value measurement for the recognition and measurement of trade receivables.
Like trade receivable, trade payables are also measured at fair value. Leased plants and
equipment is measured at fair value. After that, all loans and borrowings of Whitehaven Coal are
measured at fair value. The company measures their finance income at fair value. At the same
time, it can also be seen that Whitehaven Coal has used certain assumptions and inputs for the
valuation and determination of the fair values of the assets and liabilities
(whitehavencoal.com.au, 2019).
Compare and Contrast: It can be seen from the above discussion that both Origin Energy and
Whitehaven Coal has adopted certain mechanism for the measurement of fair value. The main
similarity between these two companies is that both of these two companies have adopted a three
level hierarchies for the determination of the fair value. In addition, both of these two companies
have provided information about the total values of assets and liabilities carried at fair value in
2018 and 2017 (originenergy.com.au, 2019). However, when considering the difference, it can
be seen that Origin Energy has disclosed the detailed fair value methodologies for the financial
instruments; and this detailed disclosure is missing in case of Whitehaven Coal. In addition,

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Origin Energy has disclosed all the main inputs and assumptions for fair value measurement, but
Whitehaven Coal has not provided any detailed disclosure (whitehavencoal.com.au, 2019).

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References
Altamuro, J., & Zhang, H. (2013). The financial reporting of fair value based on managerial
inputs versus market inputs: evidence from mortgage servicing rights. Review of
Accounting Studies, 18(3), 833-858.
Betakova, J., Hrazdilova-Bockova, K., & Skoda, M. (2014). Fair value usefulness in financial
statements. DAAAM International Scientific Book, 433-448.
Cpaaustralia.com.au., (2019). IFRS 13 FAIR VALUE MEASUREMENT FACT SHEET. Retrieved
6 February 2019, from
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/ifrs-factsheets/factsheet-ifrs13-fair-value-measurement.pdf?la=en
Francis, B., Hasan, I., & Wu, Q. (2013). The benefits of conservative accounting to shareholders:
Evidence from the financial crisis. Accounting Horizons, 27(2), 319-346.
Goh, B. W., Li, D., Ng, J., & Yong, K. O. (2015). Market pricing of banks’ fair value assets
reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and
Public Policy, 34(2), 129-145.
Hodder, L., Hopkins, P., & Schipper, K. (2014). Fair value measurement in financial
reporting. Foundations and Trends® in Accounting, 8(3-4), 143-270.
Lachmann, M., Stefani, U., & Wöhrmann, A. (2015). Fair value accounting for liabilities:
Presentation format of credit risk changes and individual information
processing. Accounting, Organizations and Society, 41, 21-38.

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Linsmeier, T. J. (2013). A Standard setter’s framework for selecting between fair value and
historical cost measurement attributes: a basis for discussion of “Does fair value
accounting for nonfinancial assets pass the market test?”. Review of Accounting
Studies, 18(3), 776-782.
Magnan, M., Menini, A., & Parbonetti, A. (2015). Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), 559-591.
Originenergy.com.au., 2019. 2018 Annual Report. Retrieved 6 February 2019, from
https://www.originenergy.com.au/content/dam/origin/about/investors-media/
documents/Origin_2018_Annual_Report.pdf
Palea, V. (2014). Fair value accounting and its usefulness to financial statement users. Journal of
Financial Reporting and Accounting, 12(2), 102-116.
Whitehavencoal.com.au., 2019. Annual Report 2018. Retrieved 6 February 2019, from
http://www.whitehavencoal.com.au/wp-content/uploads/2018/09/WVN_224754_Annual-
Report-2018_LR_FA-3.pdf