Evaluating the Impact of Fair Value Accounting in Financial Crises

The report delves into the role of fair value accounting as highlighted by various studies and literature, focusing on its implications during financial crises. It discusses how changes in accounting standards, particularly IFRS, affect corporate governance and financial reporting. The analysis draws fro...Read More

RESEARCH PROJECT

Table of Contents
Chapter: 1 INTRODUCTION..........................................................................................................1
Overview of the research: ..........................................................................................................1
Background of the study: ...........................................................................................................1
Objective of the study:................................................................................................................1
Measurement of relationship among historical cost and fair value accounting..........................1
CHAPTER: 2 LITERATURE REVIEW.........................................................................................4
Accounting review......................................................................................................................4
Identification of valuation practices for PPE and intangible .....................................................5
CHAPTER: 3 RESEARCH ANALYSIS........................................................................................7
Evaluation of Unilever plc accounting policies: ........................................................................7
Analysis of BHP Billiton: ..........................................................................................................7
In accordance with American express: ......................................................................................8
CHAPTER: 4 RECOMMENDATION............................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

Chapter: 1 INTRODUCTION
Overview of the research:
Financial accounting is a systematic field of accounting which is related with summary,
evaluation and recording of financial transaction concern to a business. This would consists of
formulation of financial statements those are useful for public activity (Botzem, 2012). This
research is provide various information about historical cost and fair value accounting for non-
financial assets. It will be explain by using IFRS 13 fair value measurement and IASB
framework. Benefits and limitation of various challenges those are helpful in PPE and intangible
in order to review accounting literature. All those practices those are being followed under the
belt of fair value and historical data are analyse under this particular research project. On the
basis of complete evaluation of accounting information some specific suggestion is being draw
those are useful in generating better outcomes in near future.
Background of the study:
The research is all about collecting necessary information about financial accounting
evaluation about historical cost and fair value measurement. It is more effective in recoding and
interpreting better outcomes for the companies (Brief and Peasnell, 2013). There are some
specific measurement methods those are use as a key accounting components which are
associated with IFRS. This research is entirely target all those crucial aspects those are helpful in
evaluating positive outcomes between historical cost and fair value in recording of financial
transactions.
Objective of the study:
The purpose of conducting this particular research is to make comparison among use of
fair value measurement and historical cost during recording of entries into books of accounts.
Use of these concepts in accounting can be beneficial of the company in longer run are analyse
in more effectively.
Measurement of relationship among historical cost and fair value accounting
In every business organisation, whether small or large scale they need to make use of
accounting system in more proper manner. There are various principles and concepts which has
been an issues of large treatment over the last couple of year. As investors has started to
harmonise in financial reporting standards in order to gain and compare financial reports those
1

are prepare during the year. The two of the main accounting concepts of historical cost and fair
value accounting is identify as incompatible with one other.
Initially, it will deliver benefits to provide a complete comment on use of fair value and
historical cost accounting in order to determine there core similarity. It has been seen that all the
assets and liabilities are analyse and measure and recorded according to it real acquisition cost
(Chambers, 2014). However, assets those are tend to have significant value over the time would
provide better results those are measure at the time of preparing financial statements of an
organisation. Moreover, reliability and accuracy of mentioned acquisition value are sometime
questionable by investors. Fair value accounting can allow managers to show shareholders with
various views of company's financial position in terms of assets and liabilities on the basis of
present market prices.
Concepts of fair value accounting according to IASB, is that the amount for which that
assets would be exchanges or recorded into the statements or liabilities must be settled. In some
situations, it has be argue that reliable market prices can be attain for a particular assets.
Historical cost are said to be original cost which is incurred in the previous time in order
to acquire an assets. According to convention that needs assets to be realise at their original
historical costs basis.
Like for examples:
A Machine was acquire for 5years worth for $10000
Cost of new machine with similar specification cost $40,000
Present market value of machine would be $6,000.
Depreciation over its total life of 10years.
Net books value: Total cost of machinery – Accumulated depreciation
: $10,000- $5000
: $5,000.
Note:
Accumulated depreciation: 10000*5/10= 5000
There are certain exception which are categories as under historical cost are valued at
historical cost can be valued according to various market prices.
2

As per IFRS 13, that is related with fair value measurement or disclosure. It doesn't
consider share base payment transactions, leasing options and some other aspects those are
categories under measurement of accounting data.
Fair value is known as the prices which is being retain to sell an assets or to make
payment to transfer a debt. It is a systematic transaction among market prices and measurement
recording date. Under this, a specific assets or liabilities those are subject of measurement are
enter consistently (Chiapello, 2015). In case of non-financial assets, measurement of date is
analyse on its highest values those are of best use. According to IFRS 13, any entity wants to
categories certain assets or liabilities can be measure as per the price at with they are recorded on
the date when they are incurred. They use of assume a regular transaction among market
participants at market date under present market situations.
3

CHAPTER: 2 LITERATURE REVIEW
Accounting review
This particular chapter reviews financial accounting information regarding historical cost
and fair value accounting use during the time of recording entries into financial statements. The
contribution to financial accounting analysis and understanding have been more impressive and
it remain more challenging for accounts managers in recent times. According to Choudhary,
2011 IAS 16, which deal with PPE and intangible assets such as plant, property and equipment
those are analyse during the time of accounting treatment. PPE is generally, measure on their
actual cost such as either use as a cost or revaluation method. It also depreciated so that their
amount can be allocate on systematic manner over total useful life of assets.
In the view point of Dixon and Frolova, 2013 the first cost measurement for PPE would
be recorded at original cost at which they are acquire. For this, measurement consequent to initial
recognition are mainly categorise as two accounting models. Such as cost and revaluation model.
Cost estimation are numerical algorithms those are use to determine the costs of a
products. This come out to be perfect models those are typically important to gain permission to
make any business plan or budgets. Whereas, revaluation model provide a business the right
option to carry a fixed assets at its real cost. All those assets which are carried on its books value
are considered as on fair value amount.
Benefits and challenges of using historical cost:
The primary advantage of using this type of cost in the balance sheet is to target property,
plant and equipment in order to verify historical costs. In the words of Goncharov and Triest,
2014 mainly, this cost at the time of purchase is documented which consists of invoice, payments
and other transfer taxes. By the help of historical cost of PPE except land, is identify total cost of
depreciate expenses those are recorded in profit and loss statements. The main point is that
accumulated depreciation is also recorded as devaluation from the assets as on historical basis on
the balance sheet. Historical accounting is defended on the stage that it is only legally recognised
accounting tools accepted as a basis for taxation and dividend deceleration etc.
During the times of inflation, the value of cost can decline and likewise, the monetary
currency which is use as standard measurement cannot have constant value with increase in
4

prices. Historical costs ignores decline in total value of currencies and keep including all
transactions those are acquire at various dates with the amount of purchasing ability.
Advantage of using fair value measurement accounting:
In the opinion of Haller and Wehrfritz, 2013fair value accounting is a financial
techniques in accounting under which a company can measure and make report on the basis of
estimated amount of amount. It would be receive from total assets such as plant, equipments and
property. In this types of accounting, a company would make report a loss, if there is a decrease
in value of assets or increase in the total value of liabilities. One of the biggest benefits of fair
value accounting is that which is more clear. The value of an assets increases the company's
make adjustments according to the current market value. On the other hand Horngren and et .
al., 2012 when there is a downfall the value of assets or debts is marked down to present as per
the variation under the value. By this, account managers can get more reliable valuation of assets
and liabilities at any point of time.
Identification of valuation practices for PPE and intangible
Shareholders always demand from managers to make accounting information for
valuation purposes. It is necessary to assess position of managers for resources passes to them.
This accounting data is having long term growth opportunities because they are recorded on
historical cost (Zeff, 2016). This studies analyse the nature that present current evidence on the
selected option such as historical cost and fair value measurement accounting. These are valued
amongst corporate bodies after making use of IFRS and mainly target on liquid assets for which
fair valuation can be evaluated. There are certain valuation practices which are being followed
by the various company's at the time of recording financial transactions. For this purpose, three
main company from different stock exchanges in order to examine accounting practices.
Company Stock exchange
Unilever Plc FTSC
BHP Billiton ASX
American Power corporation NYSE
In order to analyse accounting practices of the above selected company's account
managers need to use various financial statements such as income statements and balances sheet.
In case of Unilever plc:
5

The accounting valuation practices is based on fair value as because the plant, property
and equipments are recorded on fair values. All these assets is measure at that cost which is
suitable at the time of transaction costs less depreciation and accumulated impairment losses.
PPE is subject to analyse for impairment, if triggering activities or situations are indicate that
must important for the company (Kaplan, 2011). Intangible assets are mainly measure at cost
being purchase price as at the time of acquisition. Unilever recognises as any particular
classifiable intangible assets those are separate from goodwill generated by the company.
In case of BHP Billiton Plc:
According the annual report of 2016, the PPE is recorded at cost which is less than
accumulated depreciation and impairment charges. Cost is analyse by using fair value of
consideration those are useful in getting assets at the time of its acquisition. It consists of direct
costs of transfer the assets to a particular location and situation for making estimation of future
costs of closure (Penman, 2011). Evaluation of intangible assets in case of BHP Billiton, where
the fair value of the consideration those are paid for a business acquisition exceeds at fair value
of the identifiable assets, liabilities and contingency liabilities. In case of group capitalise cost
which is paid for acquisition of determine intangible assets that are contributed to future periods
in case of revenue generation.
In accordance with American Express corporation:
As pre the financial report of 2016, it has been analyse that intangible assets are amortize
on straight line basis over an estimated useful life of one to 22 years. The company can reviews
long term assets concluding intangible assets. Premises and equipment consists of leasehold
improvements that are carried at loss cost accumulated depreciation. All those costs which are
being use for the purpose of capitalise once an assets is place in service (Laux, 2012). There are
certain costs which are depreciated with acquisition or development of inside use of system those
are use to record premises and equipment. A fair value hedge consists as a derivatives tools
which is use for the purpose of recording various assets those are recorded in a year.
6

CHAPTER: 3 RESEARCH ANALYSIS
On the basis of valuation accounting practices which are conducted for three main
company's those are generating sufficient amount of profitability. In order to determine there
accounting practices use for the purpose of recording assets such as plant, property and
equipments or intangible assets as non-financial terms (Mala and Chand, 2012). There are some
specific areas that are use to record assets in various statements such as balance sheet and income
statements. After making proper evaluation of various accounting practices of selected
companies, it has been found that more maximum of them are trying to use fair value of
accounting for intangible assets in annual distribution. For plant, property and equipments, it is
found that 3% of companies are using fair value accounting for at least one set of assets. There
are certain exception which are needed to be follow for recording accounting transactions. All
those assets that are related to plant and equipments are forever value at historical costs.
Evaluation of Unilever plc accounting policies:
According to financial statements and accounting adjustments are analyse by using some
specific points that remain more valuable for making crucial decision-making. It has been found
that every assets and liabilities are not been carried for maximum one accounting period. During
analysis of fair value accounting system, it has been found that if any indication of impairment
losses arises the assets and cash must be incur with estimated costs in income statements
(McCarthy, Shelmon and Mattie, 2012). The growth rate use to determine future performance
those are relies on conservative closing of total income generated by the company.
Analysis of BHP Billiton:
In order to identify non-financial assets valuation practices of BHP Billiton in Australia
that are based on accounting policies followed by the company. These assets, classified as finite
use of intangible assets those are recorded in balance sheet at fair value consideration. Those
assets which are having useful lives are amortise on straight line basis over the total estimated
year. The benefits of removal activities are realise at the time when stock produce. Some
associate costs are analyse and enter in accordance with total amount determine during one
financial year (Nobes, 2011). Fair value for mineral and petroleum assets is mainly determine by
using independent market assumption. These are calculated as per present value of estimated
future cash flows those are non-identical or can be arise from regular use of assets.
7

In accordance with American express:
In case of this particular company, all the assets such as plant, property and equipments
are analyse on the basis of net realised value. According to rule of IAS 1 disclosure there are
certain rules and regulation which are being follow in order to record various assets on the basis
of fair value accounting. In accordance with reducing risk those are arises at the time of
recording it into various financial statements (Müller, 2014). In January 2016, FASB issued
some new accounting polices on realising and measuring value of financial assets as well as
liabilities. With the use of few adjustments and accounting treatment those are done for the
purpose of making payment of short-term loans.
8

CHAPTER: 4 RECOMMENDATION
After making proper evaluation of accounting practices those are use for the purpose of
analysis data on the basis of historical cost and fair value accounting. In case of plant, property
and equipments or intangible assets that are useful in accordance with IFRS and IASB
regulations. There are certain rules and regulation which are use in order to adjust assets before
posting it into various financial statements . The companies is divided according to its fair value
accounting, if its is recognise at least one class of assets. Equally, a company is categories as one
of the useful areas to be classify as self constructed and controlled by an organization. The fair
value accounting is more effective because there is huge chance of getting maximum profit
during the year.
As for investment purpose, it is necessary for every department to make use of
accounting practices in order to minimise mistakes those are arises at the time of valuation. In
specific purpose, it has been found that the use of fair value accounting for investment property
are more useful and perfect to get reliable results. It has been suggested to use always apply
accounting practices those are based on financial accounting system. By this, manager can make
use of resources in perfect manner and chances of getting maximum profitability can be
enhanced.
CONCLUSION
From the above project report, it has been concluded that financial accounting is an
effective tools which is helpful for the managers to record financial transaction of the company.
This project research is entirely focus on use of historical data and fair value accounting measure
in various company so that better outcomes can incurred. These benefits are also use for the
purpose of analysing performance of the company. Examination of fair accounting and historical
costs in relation with the PPE and intangible assets discuss clearly under this project.
9

REFERENCES
Books and Journals:
Botzem, S., 2012. The politics of accounting regulation: Organizing transnational standard
setting in financial reporting. Edward Elgar Publishing.
Brief, R. P. and Peasnell, K.V. Eds., 2013. Clean surplus: A link between accounting and
finance. Routledge.
Chambers, R. L. ed., 2014. An accounting thesaurus: 500 years of accounting. Elsevier.
Chiapello, E., 2015. Financialisation of valuation. Human Studies. 38(1). pp.13-35.
Choudhary, P., 2011. Evidence on differences between recognition and disclosure: A
comparison of inputs to estimate fair values of employee stock options.Journal of
Accounting and Economics. 51(1-2). pp.77-94.
Dixon, J. and Frolova, Y., 2013. Accounting for good governance: The fair value challenge.
Corporate Governance: The international journal of business in society. 13(3). pp.318-
331.
Goncharov, I. and Triest, S., 2014. Unintended consequences of changing accounting standards:
the case of fair value accounting and mandatory dividends. Abacus. 50(3). pp.341-367.
Haller, A. and Wehrfritz, M., 2013. The impact of national GAAP and accounting traditions on
IFRS policy selection: evidence from Germany and the UK. Journal of International
Accounting, Auditing and Taxation. 22(1). pp.39-56.
Horngren, C., and et . al., 2012. Financial accounting. Pearson Higher Education AU.
Kaplan, R. S., 2011. Accounting scholarship that advances professional knowledge and
practice.The Accounting Review. 86(2). pp.367-383.
Laux, C., 2012. Financial instruments, financial reporting, and financial stability. Accounting
and business research. 42(3). pp.239-260.
Mala, R. and Chand, P., 2012. Effect of the global financial crisis on accounting convergence.
Accounting & Finance. 52(1). pp.21-46.
McCarthy, J. H., Shelmon, N .E. and Mattie, J.A., 2012. Financial and accounting guide for not-
for-profit organizations (Vol. 6). John Wiley & Sons.
Müller, J., 2014. An accounting revolution? The financialisation of standard setting. Critical
Perspectives on Accounting. 25(7). pp.539-557.
Nobes, C., 2011. IFRS practices and the persistence of accounting system classification. Abacus.
47(3). pp.267-283.
Penman, S., 2011. Accounting for value. Columbia University Press.
Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.
Online
Benefits of IFRS. 2017.[Online].Available through:
<https://webcache.googleusercontent.com/search?q=cache:BQ6_Ux5AmYwJ:https://
www.morganmckinley.ie/article/5-benefits-ifrs+&cd=3&hl=en&ct=clnk&gl=in>.
10