Importance and Implication of Fair Value Accounting and Reporting

This assignment discusses the importance and implication of fair value accounting and reporting in contemporary world. It analyzes the methods of two ASX Limited companies for valuation of assets as per fair value approach. The subject is Corporate Accounting and the course code is not mentioned. The course name and university are also not mentioned.

Corporate
Accounting
Assignment

1
By student name
Professor
University
Date: 20th Sep 2018.
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Executive Summary
In the following assignment the importance and implication of fair value accounting and
reporting is stated. Fair value as a concept is very complex and refers to the method based on
which assets and liabilities that are stated on the annual reports of the company are based on the
overall market value that they have. Two ASX Limited Company have been selected and their
methods for valuation of the assets as per the fair value approach has been analysed and
discussed in detail.
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Table of Contents
PART A.........................................................................................................................................................4
Introduction.................................................................................................................................................4
Analysis........................................................................................................................................................5
Conclusion...................................................................................................................................................7
Part 2...........................................................................................................................................................7
References...................................................................................................................................................9
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PART A
Importance of fair value accounting in contemporary world
Introduction
Fair value is the tool that uses the market prices for the valuation of the assets and
liabilities of the company for the preparation of the financial statements. It is the estimated price
at which an asset is sold or a liability is paid off with any third party under the prevalent market
conditions. The main idea behind fair value accounting is to consider the prices that the
companies are ready to pay under active market. Active market means the one in which there is a
lot of transactions that are very high and that includes lot of sufficient information about the
prancing. Also, it is important that from the market the fair value is taken from should be the
principle market for the assets and liabilities of the company (Andiola, et al., 2018). Greater
volume of transactions leads to better pricing and companies should always look out for that.
Now many companies are trying to adopt this practice of fair value marketing for the preparation
of the financial statements under contemporary world of accounting. This means that the assets
and liabilities would be reflected in the financial statement at their fair values. It is also important
to consider that fair values should be taken as a basis on which the performances of the company
are being evaluated. In this assignment we will discuss what are the overall implication of taking
fair value accounting in the contemporary world and how the companies around the world are
affected by this (Appelbaum, et al., 2018).
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Analysis
In the given assignment, Laux and Lez have stated that fair value accounting and the debate that
is related to that will not die soon. There are many factors that the companies need to consider
when they are selecting any specific method for the measurement of their items, to make sure
that the measurement is to the best of the ability of the company and incurs the best result under
any given situations (Axelsen, et al., 2017).
Fair value reporting has been considered in many companies as a basis for the measurement of
the value of the financial assets of the company, and the financial instruments that they deal in
the market, but for traditional items of the balance sheet this method is still not consider that
applicable as the management feels that it might under value or over value the asset in some
cases. So, we see that there is a negative approach on part of the management, also one more
reason why companies don’t consider this is a good option is because they are not having active
market for all the items so at any given point it becomes difficult to ascertain what the fair value
would be. Also, there are lot of fluctuation happening and that gives an unstable approach to the
financial statements if they are prepared based on the fair value accounting (Bailey, et al., 2017).
The aim should be that companies should present the correct value of their assets and liabilities
and that is possible only when there is stability in the overall approach of the management and
that is not possible in this context.
Also, we see that companies both private and public are very sceptical when it comes to applying
these principles given the overall level of complexity involved in the valuation of the same.
Thus, they do not prefer that they use it for their overall general reporting framework, though the
authorities are trying to incorporate the same in their corporate reporting framework. There are
many challenges that the companies must face in general thus they do not prefer to apply such
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kind of measurement method that would require added cost and efforts as they must take help
from valuation experts for the determination of the fair market value (Bumgarner & Vasarhelyi,
2018). Also, there are various approach for its measurement like the market value approach,
income approach and cost approach. So different companies can opt for different methods and
measuring very item of the balance sheet on different approaches is not feasible as it will render
a redundancy to the information that the management is providing in their annual reports. It will
be difficult for the stakeholders also to ascertain which measure has been adopted and whether it
is feasible or not (Garon, 2018). Thus, it means that on various grounds the management will
struggle in case they adopt this basis of measurement for the company. They should also see that
the authorities are trying that they can incorporate this principle of corporate reporting in the
long run, but in that way, we can see that there are areas in which it won’t be feasible like
measurement of the inventory, or the property plant and equipment, because they need to
consider the concept of depreciation also. So, we see that it is a very complex method altogether
(Fukukawa & Mock, 2011).
Also the concept of fair value accounting is having relevant effect on the subprime and other
crises of the world because people are considering which methods to employ for the
measurement of the assets, as at any given day the market price would be the amount that which
the companies would sale of their products and that should be its value technically but when it
comes to preparation of the financial statement this is a wrong method and can make the process
very complex, thus the need of the hour is that the issues that are related to contemporary
accounting should be taken care of in such a way that correct value is presented in that
(Heminway, 2017). Fair value measurement is adopted as a technique for the measurement of
assets of the company like financial instruments because they are traded in market and there is
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active market present for them, which is not available for many other items of the balance sheet.
Hence it makes the entire process complex.
Conclusion
Based on the overall analysis it can be said that companies should try to see whether they can
employ these measurement policy of fair value reporting and with time there would be many
changes that would make it feasible enough to apply these principles but the authorities need to
do a lot of research for that because accounting as a concept should remain static if not anything
else and investors should get the correct information of what they are indulging and investing in
and in what ways would this be feasible for them in the long run.
Part 2
In the given case two companies have been selected that are listed on the Australian
Stock Exchange. The two companies are Telstra Corporation and TPG Telecom. Both are
companies belongs to the telecommunication sector and are one of the leading companies in
Industry (Mock, et al., 2018).
Telstra Corporation deals in consumer electronic goods like mobile phones, software etc. It also
helps in providing services to the business for installation and management of their
telecommunication lines. It works under two levels, business to consumer and business to
business. The overall operations of the company are limited to Australia and the company is also
considering moving to other countries also.
TPG Telecom is an Australian Company that provides consumer mobile services and business
internet services. It is more of consumer oriented company and there is not much business to
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business transactions. Most of the services that they provide are very reliable and easy to use for
the consumer.
In the given part, the fair value accounting measures that these specific companies adopted is
cited and presented and explained below.
In the given below extract it can be seen how the company is valuing the identifiable intangible
assets at the fair market value at which they have acquired it. It is stated that the discretion of the
management of the company in ascertaining that appropriate judgement is involved in the
valuation of the intangible assets at their fair value. It involves estimating time and amount of
future cash flows that have been derived and the rate at which the rate at which these cash flows
are discounted are also taken into consideration for the management (Lessambo, 2018). These
estimations are based on several factors that includes current forecasts done, considering the
overall growth rates for the costs, the overall operating costs and the useful life of the asset
overall (Sirois, et al., 2018). Thus, we see that there is a lot of judgement elements that is
involved on part of the management and thus they need to be sure before taking any steps and
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often requires help of valuation specialists. But this can be applied only in case of intangible
assets, in case of property plant and equipment the same is not considered (Segal, 2017). The
auditor has stated the same in their audit report under key audit matters and considered it as a
matter of importance and where there can be certain risk elements involved that can affect the
position of the company and of the investors.
TPG Telecom
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In case of TPG telecom the assets and liabilities are measured at historical cost expect those that
have been acquired under normal course of business combination means in cases where there
have been any merger or acquisition. In that case the assets and liabilities have been measured at
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fair value of accounting and their position has been considered as an important element for the
corporate reporting segment of the company.
The company has given off right shares to the shareholder and have valued the same at fair
value. For assets that have been acquired under business combination the company has followed
Inventories are measured at normal sales prices that prevail under normal business conditions,
and in case of intangible assets they have taken into consideration the discounted cash flow
method. For valuation of property plant and equipment they have quoted market price for similar
items.
Thus, based on all this it can be said that method of valuation is Many but it depends on entities
which they choose. Between the two companies TPG has made better disclosure of the methods
adopted and have stated it clearly the methods are also very diverse. Which in case of Telstra is
very limited and there is only very asset that are valued as per fair value approach.
References
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation,
and Closing Review Notes in the Audit of Accounts Receivable.
Issues in Accounting Education, 33(2), pp.
43-55.
Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A
comprehensive literature survey and framework for external audit analytics..
Journal of Accounting
Literature, 40(1), pp. 83-101.
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Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public
sector financial audit.
International Journal of Accounting Information Systems, 24(1), pp. 15-31.
Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit
Process: Evidence from Audit Fees and Audit Delay.
Auditing: A Journal of Practice & Theory, 37(3), pp.
25-46.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view..
Continuous Auditing: Theory
and Application, 20(1), pp. 7-51.
Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability.
Auditing: A
Journal of Practice & Theory, 30(1), pp. 75-99.
Garon, J., 2018. Ownership of University Intellectual Property.
Cardozo Arts & Ent. LJ, 36(1), p. 635.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents.
SSRN, pp. 1-35.
Kachelmeier, S., Schmidt, J. & Valentine, K., 2018. The disclaimer effect of disclosing critical audit
matters in the auditor’s report.
SSRN, 2(1), pp. 1-39.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing.
Accounting, 3(1), pp. 19-22.
Lessambo, F., 2018. Audit Risks: Identification and Procedures.
Auditing, Assurance Services, and
Forensics, 3(1), pp. 183-202.
Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to
Enhance the Audit Quality Assurance Inspection Process.
Journal of Emerging Technologies in
Accounting, 15(1), pp. 29-43.
Mubako, G. & O'Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended
consequences on evidence evaluation.
International Journal of Auditing, 22(1), pp. 55-64.
Segal, M., 2017. ISA 701: Key Audit Matters-An exploration of the rationale and possible unintended
consequences in a South African.
Journal of Economic and Financial Sciences, 10(2), pp. 376-391.
Sirois, L., Bédard, J. & Bera, P., 2018. The informational value of key audit matters in the auditor's report:
evidence from an Eye-tracking study..
Accounting Horizons., 32(2), pp. 141-162.
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