ACC202 - Fair Value Accounting: Comparative Analysis of Two ASX Firms

This essay provides an analysis of fair value accounting in corporate reporting, with a focus on two ASX-listed companies, Westfarmers and Woolworths. Part A discusses the pros and cons of fair value accounting, highlighting its role in reflecting economic reality and providing early warning signals for financial distress. It also touches upon the impact of fair value accounting on the 2008 financial crisis and the application of IFRS 13. Part B presents a comparative analysis of how Westfarmers and Woolworths apply fair value accounting in their financial reporting, particularly for investments, financial instruments, and intangible assets. The essay emphasizes the importance of disclosures and adjustments made by the companies in relation to these accounts, offering insights into their valuation and recognition approaches. Desklib offers similar solved assignments and resources for students.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Table of Contents
Part A.........................................................................................................................................2
Part B..........................................................................................................................................5
Reference....................................................................................................................................8

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Part A
FAIR VALUE ACCOUNTING
Mark to Market or Fair value accounting shows the current price or the potential of
the asset in the market. Assessment of fair value accounting is one to reflect economic reality
in the corporate environment. The fair value shows the potential price in which the asset can
be bought or sold in respect of the cash flows or the economic benefits flowing from the asset
(Goh et al. 2015). The cons and pros of applying the fair value accounting in the financial
reporting framework has been taken more into consideration after the financial crisis. Fair
value accounting is important and should be applicable on the corporate accounting standards
and the same to be applied on the financial statements of the company. A financial report of
the company is a mixture which contains variety of assets and liabilities classified at different
value according to their nature and characteristics. FAS 157 clearly defines the concept of
fair value accounting as a price that would be paid or received from the transfer of the asset
on the measurement date (Magnan, Menini and Parbonetti 2015).
The crucial debate that is linked with the application of fair value accounting is that
the financial market is not static it keeps on changing. Financial Assets and economies
operates through various business cycles and the value of the assets can be volatile or during
the boom period and recession period making difficult for the company to present financial
information. A stable and secure accounting approach providing a classified way of defining
the assets and liabilities of the company should be the key aim of the financial report of the
company. The key points that should be taken into account is that during economic booms
financial institution and companies will be taking high amount of leverage where the value of
their financial assets would be going up (Gohet al. 2015). These can be the key points which
were noted during the financial crisis. However, it is crucial to note that the Historical Cost

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Accounting (HCA) does not allow the revaluation of the asset during the business cycle and
under the economy in which the company operates. On the other hand it Fair Value
Accounting (FVA) would allow the investors and the stakeholders of the company asses the
financial position of the company thereby taking several steps. It would be providing an early
warning signal if the financial assets of the company would be disrupting the financial
position of the company and the operation of the company (Durocher and Gendron 2014).
The application of the fair value accounting did result in the financial crisis as the new
accounting standards showed that this companies should recognize liabilities in the financial
report where the company expects that the economic benefit would be outflowing from the
same. Recognition of liabilities of the company with the fair value accounting standards was
the key reason for the financial crisis. Companies did not had sufficient coverage of assets
and leverage and financial risk of the companies increased substantially with the application
of the fair value accounting. If the Historical Cost Accounting is applied public and private
sector may still take high amount of leverage if they sell their asset on a securitization basis
where the performance of the asset would be guaranteed by the company. This would not
only provoke banks to sell their inefficient asset but will also increase the financial risk
associated with the company (Ettredge, Xu and Yi 2014).
A wider and a classified approach of accounting classifying and characterising the
assets and liabilities based on their nature can be the best solution for the organisations. The
application of IFRS 13 is for annual reporting which starts from 1st Jan 2013 that defines the
fair value and sets out the framework for the measurement of the various assets and liabilities.
The financial report which is presented by the company should be such that it benefits the
financial users for making important economic decision about the investment (de Jager
2014). It is also important that the fair value accounting should be applied in the context of
financial assets whose values are closely linked to the performance of the financial market

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and the relevant movement or the adjustments should be made in the other comprehensive
income statement which is done currently in the accounting standards (Lachmann, Stefani
and Wöhrmann 2015). The application and the creation of such reserves solves the problem
of volatile financial statements where the changes in the value of financial assets is directly
adjusted with shareholders equity. Thus, the same also reflects economic reality and
application of fair value accounting which can be useful by the shareholders for making
important and potential decisions about the company.

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Part B
Fair Value Accounting takes an important part in the overall reporting and viability of
the financial position of the company in contrast to the market values. Fair value accounting
is followed by company for most of their financial assets and relevant disclosures are made in
accordance so that material information could be given to the financial users and the
stakeholders of the company for assessing the sustainability of the company. The annual
report for the Westfarmers and Woolworths Company for the year 2018 was taken into
consideration for the analysis of the various financial information and data provided by the
company in respect to the fair value accounting used by the company (Dong, Ryan and Zhang
2014).
Wesfarmers Company: Investments held by associates and financial instruments are some
of the common accounts which are classified at the fair value accounting by the Wesfarmers
Company.
The Goodwill reported by the Wesfarmers Company is acquired through business
combination measured at the cost value. Westfarmers Company periodically reviews assets
which have an indefinite lives so that any material changes in the accounts can be reflected in
the financial statement of the company. The intangible assets reported by the Westfarmers
Company which were having an indefinite life’s were the brand values and gaming and liquor
licenses (Demerjian, Donovan and Larson 2016).
Classification of revenue, trade receivables of the company, financial assets, interest
bearing loans and borrowings which are carried at the amortised cost and later on adjusted
according to the fair value adjustments. Hedging instruments plays a crucial role in the
operational and financial aspect of the company allowing the company to hedge against large
volatile movement in the financial market and forex market. Wesfarmers Company has

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several of its derivatives instruments and forex assets which are reported by applying the fair
value accounting concept.
Woolworths Company: The Woolworths Company applies the concept of historical cost
accounting for the preparation of the financial report of the company except for some of the
key and crucial assets of the company such as the financial assets and liabilities. The financial
assets and liabilities including the derivatives instruments and interest bearing loans and
borrowings have been reported at the fair value. The changes in the financial assets and
liabilities of the company has been stated in the other comprehensive income statement of the
company.
The financial instruments of the company has been valued at the fair value where
AASB 9 has been applied by the company in the perspective of the recognition and
measurement of the financial instruments of the company. For the recognition of the various
lease of the company the application of AASB 16 has been done by the company. Trades and
other receivables of the company is also valued at the fair value and subsequently measured
at the amortised cost using the effective interest rate method and by taking the charges for
impairments thereon. Financial assets of the company are also reported at the fair value and
the changes in the value of the assets are reported in the other comprehensive income of the
company (Bowen and Khan 2014).
Intangible Asset of the company like goodwill, brand names, liquor and gaming
licenses and property development rights were some of the key assets of the asset that were
having indefinite life and the same were measured at the fair value. Changes in the values of
the above accounts were directly reflected in the financial statement of the company.
Fair value accounting is done by both the above companies and several disclosures
and adjustments have been made by the company in respect to the above accounts. The

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footnotes of the company has presented crucial information’s about the assets of the company
and the valuation and recognition approach used by the company in contrast to the same.

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Reference
Goh, B.W., Li, D., Ng, J. and 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), pp.129-145.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Goh, B.W., Li, D., Ng, J. and 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), pp.129-145.
Durocher, S. and Gendron, Y., 2014. Epistemic commitment and cognitive disunity toward
fair-value accounting. Accounting and Business Research, 44(6), pp.630-655.
Ettredge, M.L., Xu, Y. and Yi, H.S., 2014. Fair value measurements and audit fees: Evidence
from the banking industry. Auditing: A Journal of Practice & Theory, 33(3), pp.33-58.
Lachmann, M., Stefani, U. and Wöhrmann, A., 2015. Fair value accounting for liabilities:
Presentation format of credit risk changes and individual information processing. Accounting,
Organizations and Society, 41, pp.21-38.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal
of Financial Reporting and Accounting, 12(2), pp.102-116.
Dong, M., Ryan, S. and Zhang, X.J., 2014. Preserving amortized costs within a fair-value-
accounting framework: Reclassification of gains and losses on available-for-sale securities
upon realization. Review of Accounting Studies, 19(1), pp.242-280.

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Demerjian, P.R., Donovan, J. and Larson, C.R., 2016. Fair value accounting and debt
contracting: Evidence from adoption of SFAS 159. Journal of Accounting Research, 54(4),
pp.1041-1076.
Bowen, R.M. and Khan, U., 2014. Market reactions to policy deliberations on fair value
accounting and impairment rules during the financial crisis of 2008–2009. Journal of
Accounting and Public Policy, 33(3), pp.233-259.
de Jager, P., 2014. Fair value accounting, fragile bank balance sheets and crisis: A
model. Accounting, Organizations and Society, 39(2), pp.97-116.