Fair Value Accounting Report: Analysis of ASX Listed Companies

This report provides a comprehensive analysis of fair value accounting practices, focusing on two companies listed on the Australian Securities Exchange (ASX): Amcor Limited and the Australian and New Zealand Banking Group Limited. The report begins with an overview of fair value accounting, its relevance in the contemporary world, and its impact on corporate reporting and financial crises. Part A explores the theoretical underpinnings of fair value accounting, while Part B delves into a comparative study of the two selected companies. The analysis includes an examination of the companies' approaches to fair value determination, methodologies employed, and a comparison of their practices. The report assesses the strengths and weaknesses of each company's approach, highlighting differences in their valuation techniques and resource allocation. The study also considers the use of market, cost, and income approaches in fair value accounting. The report concludes with recommendations for improvements in fair value accounting practices, aiming to enhance transparency and accuracy in financial reporting. This assignment was prepared by a student and is available on Desklib, a platform providing AI-powered study tools.

Running head: FAIR VALUE ACCOUNTING
Fair Value Accounting
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Running head: FAIR VALUE ACCOUNTING
Table of Contents
Part A 3
The Relevance of Fair Value Accounting in the Contemporary World 3
Is Fair Value Accounting acceptable for a broad range of public and private organisations in
corporate reporting? 4
Does fair value accounting have any influence on the subprime and/or other crises in the
contemporary world? 5
Part B 5
Selected companies on the Australian Securities Exchange 6
Approaches to the evaluation of the Fair Value Accounting of the two companies listed - The
Australian and New Zealand Group Banking Limited 6
Amcor Limited 8
Analysis of the approaches and the methodologies of the fair values of the two companies 9
Comparison of approaches and the methodologies of the fair values of the two companies 10
References 12

Running head: FAIR VALUE ACCOUNTING
Fair Value Accounting
Part A
Fair Market Value (FMV) is an estimate of a property according to its current market value.
The estimate can be found either with an extrapolation or the precedence. The market
transactions of a property or a stock are not observable for certain assets, and this is where the
Fair Market Value is calculated. They are subjective to circumstances, comparable
precedence and the assessment criteria set by the people involved. When the shares of a
specific firm are traded in the stock exchange, the stocks are bought and sold based on market
prices, the exchange actually provides one of the reliable ways to assess stock’s Fair Value..
In US, The Financial Accounting Standards Board (FASB) has issued guidelines about how
to determine Fair Value Estimates for financial reporting. The framework gives three levels
of hierarchy to assess the level of judgement for Fair Value Estimation. Fair Value
Accounting has been part of GAAP (Generally Accepted Accounting Principles) in US since
1990s.
The Relevance of Fair Value Accounting in the Contemporary World
In this modern era, where the world runs solely on corruption, fraud and black money, it is
hard to find a seller who quotes a Fair Value of their asset. The economy of the country is at
stake if a practice of Fair Accounting does not take place (CHEN, TAN and WANG, 2012).
Many companies have gone bankrupt and crashed heavily because of their unfair trading
methods. For example, in Dubai, the concept of an ‘I owe you’ bond in which, one takes a
loan based post-dated checks (the loan is given based on the word of the other person), when
this cycle continues and if for some reason, be it intentionally or unintentionally, the check
bounces, everyone in the system, who has given the loan, fall in debt. It goes to an extent

Running head: FAIR VALUE ACCOUNTING
where the person who took the loan, will watch his business fall apart and not try to
strengthen it anymore in fear of not being able to pay the debts (de Jager, 2014).
Is Fair Value Accounting acceptable for a broad range of public and private
organisations in corporate reporting?
A Fair Value Accounting should definitely be acceptable in a broad range of organisations in
the public and private sector in corporate reporting for a healthy, substantial economic growth
of the country, unfortunately, this is not the case always. In the Southern parts of India,
businessmen typically show accounts for profit in a substantially less margin than what they
have gained (Jílek, 2016). They use other means to completely hide their profit margins and
as a result of which, they on their books, show a very less profit margin to the Income Tax
Department. This is one of the examples to support this claim.
Does fair value accounting have any influence on the subprime and/or other crises in
the contemporary world?
Subprime mortgages, in the US, proved to be a very unsustainable economic model. The
banks started giving away housing loans based on their credit rate to only pay the interest and
not the principal amount. Naturally, people started affording to take loans more than what
they could pay off. Initially, the economy flourished with so many people able to afford
houses. But gradually as they started to pay off the loans, they realised they could not afford
it and they let the banks seize their houses instead (Marra, 2016). Now, the banks had too
many houses to sell which forced them reduce it to a substantially lower price which in turn
caused subprime crisis. So, it is very important to understand the implementation of a
substantial economic model to prevent further economical crunches and fair value accounting
is one way to ensure that.

Running head: FAIR VALUE ACCOUNTING
Part B
Fair value is the price on which the seller and buyer have agreed to the sale of the product. It
is determined at the market price of the product sold (Ewelt-Knauer, 2013). Fair value is the
representation of the price at which the assets of the company are sold and the price at which
the liabilities of the company are settled under the market conditions (Menicucci and
Paolucci, 2016).
This article studies the fair value accounting of the financial statements of two firms listed on
the Australian Securities Exchange. The chosen firms are Amcor Limited and the Australian
and New Zealand Banking Group Limited.
Selected companies on the Australian Securities Exchange
Amcor Limited is one of the most popular companies of Australian Securities Exchange. It is
a packaging company which aims to develop and produce quality food products and
responsible for the strong packaging of food and other products in the pharmaceutical,
beverage, home, personal care products. The financial statement studied is of the financial
year 2017-18.
The Australian and New Zealand Banking Limited is a financial banking company. It is the
third largest company in the Australian Banking Sector. The primary functions of the bank
constitute personal banking and business financial solutions. The financial statement studied
in the article is of the financial year 2016-17.
Approaches to the evaluation of the Fair Value Accounting of the two companies listed -
The Australian and New Zealand Group Banking Limited
In the notes concerning the financial statements on the fair value determination, The
Australian and New Zealand Group Banking Limited mention that the company has

Running head: FAIR VALUE ACCOUNTING
established a control framework and segregated the duties appropriately for the correct
estimation of the fair value. The company lays emphasis on the need for the correct
determination of the fair value. The framework mentioned in the company is as follows:
a. The transaction of the products to a third party is only carried out after a careful
assessment and determination of the fair value of the product.
b. The market price of the products mentioned for the representation of its value is
verified by an independent party (Rashad Abdel-Khalik, 2010).
c. The methodologies and the procedures adopted to determine the fair value of the
products of the company are by a different third party.
d. The movements in the fair value are observed by an independent authority and they
are explained by reference to underlying factors which might have influenced the fair values.
e. And the value adjustments are also independently monitored and thus stated.
The company also mentions the approaches and the evaluation techniques for the
determination of the fair value in the financial statement. These are as follows:
Financial asset and liability Fair value Approach
Trade Securities
Security (Short-sold)
Assets and Liabilities
Modelled valuation technique is used where
there is no quoted market price.
Loans, borrowings and other debt Easy cash flow techniques are used.
Non-financial instrument (assets for sale) The value is determined by the analysis of the

Running head: FAIR VALUE ACCOUNTING
price in the foreign currency and the foreign
exchange market.
Amcor Limited
The following mentions the fair value approach and the methodology as provided in the notes
to the financial statement for the fair value evaluation for the financial year 2018.
Financial asset and liability Fair value approach
Cash and cash equivalent
Financial assets and liabilities (Short-term)
Receivables of Trade and other
Payables of Trade
The estimated values are an approximation
because the mentioned assets and liabilities
are of the short-term period.
Other financial assets and liabilities The estimation is based on the market
prices.
Derivative financial instruments The evaluation is based on the current
market prices, the opinion of an independent
party and the standard valuation techniques.

Running head: FAIR VALUE ACCOUNTING
Analysis of the approaches and the methodologies of the fair values of the two
companies
It is observed that the two companies differ significantly in their approach towards the
determination of the fair value of the products. The Australian and New Zealand Banking
Group Limited has adopted a very detailed and a pragmatic approach towards the estimation
of the fair value of the products. The company has devised a control framework for the
purpose. The company has applied different methodologies for the fair value evaluation.
Apart from that, the company has sought the opinion and legitimacy of the independent third
parties at almost every step (Razak and Stainbank, 2017). This ensures that the process is
transparent and justifiable. The company has segregated the duties of the determination of the
fair value an thus ensures that the information provided in the financial statement is reliable.
The Amcor Limited, on the other hand, has relied on the estimation of the values on the
prevalent market values of the products in the most cases. The company uses the opinion of
the third party in a few cases such as that of derivative financial instruments. The company
also uses the data from the previous estimation. The company also uses the modelled
valuation technique in the process.
From a careful analysis, it can be inferred that the Australian and New Zealand Group
Banking Limited has allotted much more resources to ensure the accuracy of the fair value
accounting. The methodologies and the approaches for the determination are concrete and
reliable. The Amcor Limited uses less scientific methods and relies on the market price
mechanism for the fair value accounting of the products (Rodríguez Bolívar and Navarro
Galera, 2012). It is advisable for the company Amcor Limited to divert more resources than
the present for the accurate determination of the fair value accounting.

Running head: FAIR VALUE ACCOUNTING
Comparison of approaches and the methodologies of the fair values of the two
companies
The commonly used approaches for the determination of the fair value accounting include the
following:
a. Market
b. Cost
c. Income
Both the companies have extensively used the market and the income approach for the fair
value accounting of different financial components.
The market approach uses the price of the product determined by the forces of the market to
carry out the transactions. The product is determined by the comparison with the identical
assets and liabilities. The data used to estimate the value is real data. The derivation of the
fair value of the product requires acute judgement on the part of the management (Ryska and
Valder, 2012). This is so because the data is available for only a few factors. Also, the price
determination is also a complex process because of the presence of several influential market
forces (Alexander, Bonaci and Mustata, 2012). Therefore, the discretion of the management
may be required to understand the influence of the factors whose data is not available on the
value of the product.
The Australian and New Zealand Banking Group Limited applies the use of this method in
the determination of values of financial quotients. The company uses the modelled techniques
where the data is not available. For the determination of Non-financial instrument component
of assets, the company uses data provided by the foreign exchanges and the foreign markets

Running head: FAIR VALUE ACCOUNTING
(Shaffer, 2010). The Amcor Limited uses the approach to assess of the value of financial
assets and liabilities and derivative financial instruments wherever the data is available.
The income approach to determine the fair product value converts the future sum of the assets
and liabilities to a single present amount. This can only be estimated for a few years from the
current period. The approach requires intelligence and perspicacity to correctly estimate the
value of the product. The approach depends upon – cash flow, the period of cash flow and the
risks associated with the cash flow.
The approach has been used by Australia and New Zealand Banking Group Limited for the
determination of the fair value of loans, borrowings and other debt issuances. The Amcor
Limited uses the income approach in assessing the fair value of unquoted equity investments.
The cost approach is the approach where the value is determined by the estimation of cost
which would be used in the substitution of the assets and the liabilities and the cost incurred
by the obsolescence of the assets (XIE, 2016).
The selfish motives of the administration to change the perspective of the company is
primarily the reason for the presentation of the improper and inaccurate value of the products.
For this reason, independent and third-party analysis is required for the determination of the
values (Yuan and Liu, 2011). Both the companies have implied the use of this method to
ensure the accurateness of the value of the products mentioned in the financial statements.

Running head: FAIR VALUE ACCOUNTING
References
Alexander, D., Bonaci, C. and Mustata, R. (2012). Fair Value Measurement in Financial
Reporting. Procedia Economics and Finance, 3, pp.84-90.
CHEN, W., TAN, H. and WANG, E. (2012). Fair Value Accounting and Managers' Hedging
Decisions. Journal of Accounting Research, 51(1), pp.67-103.
de Jager, P. (2014). Liberal Fair Value Accounting in Banks: A South African Case Study.
Australian Accounting Review, 24(2), pp.134-153.
Ewelt-Knauer, C. (2013). Earnings Management in the Context of Fair Value Accounting:
Adjusting the Modified Jones Model to Fair Value Accounting. SSRN Electronic Journal.
Jílek, J. (2016). ‘Fair Value’ of Core Deposits in the EU version of IFRS: A Critical Review.
Australian Accounting Review, 26(3), pp.312-325.
Marra, A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized Economy.
Journal of Accounting, Auditing & Finance, 31(4), pp.582-591.
Menicucci, E. and Paolucci, G. (2016). Fair value accounting and the financial crisis: a
literature-based analysis. Journal of Financial Reporting and Accounting, 14(1), pp.49-71.
Rashad Abdel-Khalik, A. (2010). Fair Value Accounting and Stewardship*. Accounting
Perspectives, 9(4), pp.253-269.
Razak, M. and Stainbank, L. (2017). Fair value accounting by listed South African companies
in the non-financial sector. South African Journal of Accounting Research, 32(1), pp.1-24.
Rodríguez Bolívar, M. and Navarro Galera, A. (2012). The Role of Fair Value Accounting in
Promoting Government Accountability. Abacus, 48(3), pp.348-386.

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Ryska, J. and Valder, A. (2012). Fair value in financial accounting. Agricultural Economics
(Zemědělská ekonomika), 49(No. 11), pp.526-532.
Shaffer, S. (2010). Fair Value Accounting: Villain or Innocent Victim - Exploring the Links
Between Fair Value Accounting, Bank Regulatory Capital and the Recent Financial Crisis.
SSRN Electronic Journal.
XIE, B. (2016). Does Fair Value Accounting Exacerbate the Procyclicality of Bank
Lending?. Journal of Accounting Research, 54(1), pp.235-274.
Yuan, M. and Liu, H. (2011). The Economic Consequences of Fair Value Accounting.
Accounting, Economics, and Law, 1(2).