Fair Value Accounting in Annual Reports

This assignment requires a critical analysis of fair value accounting practices as presented in the annual reports of four publicly listed companies: FMC Corporation, Easyjet PLC, Iluka Resources Ltd. Students are expected to examine how these companies apply fair value accounting for non-financial assets and discuss the potential implications for financial reporting quality and value relevance. The analysis should draw upon relevant literature and case studies to provide a comprehensive understanding of the complexities and challenges associated with fair value accounting.

Running Head: Historical Cost versus Fair Value Accounting
Historical Cost versus Fair
Value Accounting for Non-
Financial Assets

Historical Cost versus Fair Value Accounting 2
Abstract:
This research pertains to the big dilemma about fair value accounting and historical cost
accounting method for measurement non- financial assets. We will study the companies’
choices where they can freely make a choice between the fair value method of accounting
and the historical cost method. We find with this research that the historical cost by far
dominates the fair value choice but with an exception as the investment is valued at lower of
fair value or cost there is inherent choice with the investment property owned by the
companies. If we move specifically towards equipment, plant, machinery and the intangible
assets then none of the companies use fair value accounting. Our test results show that fair
value accounting exhibits significantly higher asset values in the financial statements of the
company. The fair value accounting also proved to be contradicting with the accounting
policy choice. Our research is based on the 3 companies which are from different domiciles
we did analysed their annual reports and the audited financial statements to draw out as if
which method is more appropriate for the valuation of Non- Financial Assets. IFRS and
IASB Framework also opened the choice for the companies to choose which method is more
appropriate for them as if fair value or Historical cost.

Historical Cost versus Fair Value Accounting 3
Table of Contents
Introduction:..........................................................................................................................................4
IASB Framework and IFRS Measurement Concepts in Relation to Fair Value and Historical Cost
Accounting:...........................................................................................................................................4
The Benefits and Challenges of Using Historical Cost and Fair value Accounting for PPE and
Intangibles:............................................................................................................................................5
Valuation Practices for the Non-Financial Asset Group:.......................................................................6
Conclusion:............................................................................................................................................8
References:..........................................................................................................................................10

Historical Cost versus Fair Value Accounting 4
Introduction:
The recent study is about the heavily debated issue as to use of historical cost accounting or
fair value accounting for the valuation of non-financial assets majorly property, plant and
equipment. As the IFRS give the open choice to the companies’ regarding the use of fair
value as their method of accounting or historical cost method. This has resulted in variation
of the accounting practices followed by the companies in UK, Australia and USA. We focus
on the UK, Australia and USA based companies’ and present a comparative practices that has
been adopted by them regarding the use of fair value method of accounting or historical cost
method of accounting as these three countries’ cover the major market of the world. We do
examine the changes in accounting policy followed by the companies after the
implementation of (IFRS) International Financial Reporting Standards in United Kingdom
(London), Australia and United States of America (USA). Under these new standards,
companies in these countries are free to make a choice between historical cost as method of
accounting and fair value accounting for the property, plant and equipment as well as for
intangible assets of the company that we examine. We can reasonably assume that companies
select the valuation practices optimally. Hence, the valuation methods observed in practice
provide reasonable evidence on when and where fair value accounting is contractually
efficient method for valuation (Georgiou and Jack, 2011).
With the help of this study we provide direct evidence for the application of the fair
value method of accounting and historical cost accounting under IFRS and generally
evaluates on when and where fair value accounting is being preferred over historical cost
accounting. As there are many positive reviews available for the usage of fair value
accounting and its benefits. We will not only assess the benefits that are related with fair
value method of accounting for the selected set of companies but also for the economy as a
whole as which method of accounting prove to be more beneficial for the companies and
which method companies use in practice.
IASB Framework versus IFRS Measurement Concepts:
The IFRS states that the company is free to make a choice either to use Historical cost or Fair
value accounting method to value its non-financial assets particularly (property, plant and
equipment) but it is clearly stated in IFRS that the investments need to be stated at cost or fair

Historical Cost versus Fair Value Accounting 5
value whichever is lower. The selection of historical cost method of accounting and Fair
Value accounting is directed by the IASB that promotes the decision and emphasize
usefulness of accounting decision (Christensen and Nikolaev, 2009). Fair Value accounting
method is defined as predictable price on which an organised transaction to allocate the
liability or to sell the asset will take place under present market circumstances between
market participants on the due date. The assets measured at fair value might be a group of
asset or a stand-alone asset. The fair value measurement is completely different from
offsetting the risk associated with that articular asset (Whittington, 2008). There is debate as
to adopt the fair value method of accounting or historical cost accounting to value the
property, plant and equipment and investments of the company. We need to analyse the
companies to know as if what they practice the most either fair value accounting method or
the historical cost accounting method to record the property plant and machinery in their
financial statements as there is no restrictions on part of companies or any prescribed
guidelines implemented by the IFRS procedural code and the IASB framework regarding the
method of accounting used for recording the property, plant and equipment (Kieso, Weygandt
and Warfield, 2010).
The Benefits and Challenges of Using Historical Cost method and Fair value method for
recording PPE and Intangibles:
The choice that is made by the company between Fair Value accounting and Historical Cost
method is to be stated in the notes to account under the disclosure column of accounting
policy in the annual report of the company as per the IFRS requirements and need to be
followed consistently, a company that uses fair value method of accounting will revalue its
assets every single time the book value of the asset is substantially dissimilar from the market
values of the asset. A company that chooses the method of accounting as historical cost
method for the valuation of property, plant and equipment need not to perform revaluation of
the assets on the upward side in the future (Christensen and Nikolaev, 2013). A shift between
historical cost accounting and fair value method is considered to be a thoughtful change in
the accounting principle and need to be disclosed in the notes to account section of the
financial statements of the company as the investors and other stakeholders need a
justification regarding the valuation practice of the company for property, plant and
equipment and the intangibles of the company (Boyer, 2007). The companies usually use the
Historical Cost as its method of accounting. We did analysed 3 companies one from UK, one

Historical Cost versus Fair Value Accounting 6
from New York and one from Australia all the companies use Historical Cost method of
accounting. Historical cost make available the stakeholders with the cost of investment while
the fair value guesses the measure of what management think to get in return after investing
in the company. Historical cost method is not based out of any assumption or any valuation it
is just a simple method as the cost of acquisition of the asset or the amount paid for acquiring
that asset with all the capital expenditure incurred on that asset which increased its efficiency.
The Historical cost method takes into account the wear and tear of property plant and
equipment as they are presented in financial statements at net cost that is cost less the amount
of accumulated depreciation which makes it easy for the users/viewers of financial statements
to understand the valuation.
The benefits of using fair value method o accounting are all the information are
adequate and precise for the time being and it tries to provide the most relevant estimates.
This method prove to be more accurate in valuation of the property, plant and equipment and
for the valuation of investments as the value of the asset on a particular date is estimated
although it proves to be conflicting as estimates are made by some expects and the results
may vary but still it is created on the current valuation. The Fair value measurement enhances
the informative power of the financial statements of the company as opposite to historical
cost method. Fair value method of accounting requires the firm to disclose all the wide-
ranging information about the procedures and methods used for valuation and the
assumptions being made by them in the valuation (Barth, Beaver and Landsman, 2001).
On one hand benefits of fair value method are more reasonable then the historical cost
method although the users rely on the historical cost method because ultimately they want to
know the actual flow of the money the fair value accounting estimates provide present value
of investment made by the company in previous years but the historical cost method says
about the actual spending of the company. In fact the IFRS and IASB itself remain silent
about which method is more appropriate and they also given an open choice regarding the use
of the fair value accounting method or Historical cost accounting method for valuing the
property, plant and equipment (Cañibano, Garcia-Ayuso and Sanchez, 2000)
Valuation Practices for the Non-Financial Assets:
All the listed companies in United Kingdom (London), Australia and USA must prepare the
consolidated statements in line with the International Financial Reporting Standards (IFRS)

Historical Cost versus Fair Value Accounting 7
and their local GAAP (Soderstrom and Sun, 2007). These new standards provide the same set
of the valuation alternatives regardless of the domicile of the company that means that the
IFRS principles are applicable to all over the world equally. Yet these companies are relying
on very different local GAAP regimes as well as institutional environment. Upward
revaluation is not allowed for any of the assets group that is property, plant and equipment or
the intangible assets under UK GAAP, while under US GAAP companies need to recognise
the investment at the lower of fair value or historical cost. IFRS elaborates the valuation
methods adopted by the companies in UK, Australia and USA (Ball, 2006). Companies
which are domiciled under any of the three countries are allowed to adopt the IFRS method
or to endure with the same valuation as stated in the local GAAP. . This means that the
companies domiciled in the UK can shift to historical cost for the valuation of investment
property and the US and the Australia companies can switch to fair value method of
accounting for investment, property, plant and equipment once after the implementation of
IFRS. Note that the implementation of IFRS offers chance to the companies to recognise
investment property at Fair Value and for the UK companies to recognise the investment at
the historical cost method.
Our study is based out of three companies one is EASYJET which is a British airline
company based out of London. It operates on 820 routs for both domestic and international
scheduled services in more than 30 countries. EASYJET is a public limited company whose
shares are listed on the London Stock Exchange and this company is domiciled and
incorporated in the United Kingdom. The accounts of EASYJET are prepared in harmony
with the International Financial Reporting Standards (IFRS) as accepted by the European
Union. The accounts of the company are prepared based on historical cost convention as its
property plant and equipment are recorded at cost less depreciation although its derivative
financial instruments are measured at fair values except this all assets are measured at cost.
This is properly mentioned in the notes of accounts of the company that company follows
historical cost method for valuation of its property plant and equipment (Easyjet, P. L. C.
2016).
The next company selected is FMC Corporation which is diversified chemical
company serving industrial markets, agricultural markets and consumer globally with market
leading products and innovative solutions and applications. The shares of FMC Corporation
are listed on New York Stock exchange this company is domiciled in New York and serves
the diversified business line. As we have gone through the audited annual report of the

Historical Cost versus Fair Value Accounting 8
company and analysed its consolidated financial statements we come to know that the
company uses historical cost method to record the property, plant and equipment. The
majority of the investments of the company are valued at cost basically but some are valued
at fair value or cost whichever is the more appropriate for valuation (Corporation, FMC.,
2016).
The third company we selected is an Australian based company namely Iluka
Resources Limited this is specialised in mineral sand exploration. Iluka is globally the largest
producer of titanium and zircon dioxide- derived rutile and synthetic rutile. Iluka resource
limited is listed on the Australian Stock exchange and domiciled in Australia only since its
establishment. The company’s annual report and audit financial statements states that the
company’s property plant and equipment are indicated at cost less the depreciation amount
that means company uses historical cost accounting method to record the property plant and
equipment. The investments of the company are stated at cost as all the valuation by the
company is done by historical cost accounting method. It is clearly mentioned in the notes to
account of the company that the valuation method used by the company is historical method
(Iluka, Resource Ltd. 2016).
We did analysed the three companies method of valuation used for valuing property,
plant and equipment is its books of accounts and all the company’s annual report and
financial statements are audited by the auditors and no biases are there in the method of the
valuation. We covered the three major market segments of the world economy that is
Australia, United Kingdom and USA it is clearly stated in the IFRS as the companies are free
to make a choice between fair value method of accounting and the Historical cost method of
accounting (Power, 2010). As we have gone through with audited financial statements and
the annual reports of the three companies which are different in their domicile as one is
American company based in New York, another one is Australian company and the third one
is listed on London stock exchange. We also did not preferred to choose the company out of
the same segment as the segment of all the companies are totally different one is Airline
Company, another one is Chemical Company and the third one is Mineral Exploration
Company to make the study more relevant and elaborative.
As with this research we came to know that all the three companies use Historical
method of accounting for the valuation of its property, plant and equipment although the
method used for the valuation of investment is different in all the three companies but the

Historical Cost versus Fair Value Accounting 9
major thing is that the investments are recorded at cost. We had covered a vast area under our
preview for this research as we did cover all the major industry segments as well all the
majorly privileged countries in the world economy.
Conclusion:
The research is based on the most debated issue as whether to practice fair value method of
accounting or the Historical cost accounting method for the valuation of property, plant and
equipment and the investments of the company. As the Users of Financial Statements has a
significant interest in the Financial Statements of the company so we need to disclose as if
which method we chose for the valuation of our property, plant and equipment and the
investments. The IFRS and the IASB both have opened the choices for the countries and the
companies as to which method they want to adopt for the valuation of their property plant and
equipment (Barlev and Haddad, 2003).
We did analysed the three companies for the three big economies of the world namely
EASYJET based out of London, FMC Corporation based out of New York and Iluka
Resource Limited based our of Australia. After the research being made and the analysis of
their annual reports and audited financial statements is done we came to know that they all
uses Historical cost method of accounting for the valuation of their property, plant and
equipment but the method for valuation of investments vary in between these three
companies but at last we seen that the investments are valued at cost only. We did this
research and chosen the three different companies from different domicile to make the
research more effective as the company not only follows the IFRS and IASB framework but
also they have their local GAAP on the basis of the domicile of the company (Muller, Riedl
and Sellhorn, 2011). That is why only we had chosen three different company form different
domicile to know as the methods they follow coincide with each other as in all the countries
framework are somehow intersect with each other. The companies all over the follow IFRS
regulations but the local GAAP for all the countries are not same. This research proves that
the companies have a open choice as to make between the Fair Value method and Historical
Cost method of accounting and most of the companies rely on the historical cost method as
the fair value method have inherent some restrictions.
The companies should use Historical cost method as the Historical cost method
presents more valuable information for users/ viewers of financial statements as well as

Historical Cost versus Fair Value Accounting 10
shows the actual flow of funds and value after changing the depreciation. Although Fair
Value method also provide relevant information but that is a contrasting thing as the fair
value depicts the current market value of property, plant and equipment, that too on some
estimated basis. The fair value of the property plant and equipment is required only at the
time of their disposal to know about the sale value. The fair value valuation is somewhat
assumption based and complicated too. This represents the estimated value of property plant
and equipment which is against the concept of fair representation of financial statements. The
investments on the other side are more appropriate if valued at fair values as the cost of
investment has no use in the decision making. Investment is actually being for earning some
return over it so it will be more appropriate for companies to value investments at fair value
rather than valuing them on lower of cost or fair value. Hence, with this research we came to
know that the better way to value property, plant and equipment is the historical cost method
of accounting and for investment is fair value method.
References:
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investors. Accounting and business research, 36(sup1), pp.5-27.
Barlev, B. and Haddad, J.R., 2003. Fair value accounting and the management of the firm.
Critical Perspectives on Accounting, 14(4), pp.383-415.
Barth, M.E., Beaver, W.H. and Landsman, W.R., 2001. The relevance of the value relevance
literature for financial accounting standard setting: another view. Journal of accounting and
economics, 31(1), pp.77-104.
Boyer, R., 2007. Assessing the impact of fair value upon financial crises. Socio-economic
review, 5(4), pp.779-807.
Cañibano, L., Garcia-Ayuso, M. and Sanchez, P., 2000. Accounting for intangibles: a
literature review. Journal of Accounting Literature, 19, p.102.

Historical Cost versus Fair Value Accounting 11
Christensen, H. and Nikolaev, V., 2009. Who uses fair value accounting for non-financial
assets after IFRS adoption. Paper posted at SSRN: http://papers. ssrn. com/abstract,
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Science, 57(6), pp.1138-1153.

Historical Cost versus Fair Value Accounting 12
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