Foundations in Accounting: Fair Value Accounting Debate Report

This report delves into the debate between Fair Value Accounting (FVA) and Historical Cost Accounting (HCA), particularly within the context of International Financial Reporting Standards (IFRS). It examines the advantages and disadvantages of FVA, its impact on balance sheets, and whether it should permanently replace HCA for valuing non-current assets. The report uses the 2017 Annual Report of Wesfarmers as a case study, analyzing how the company applies FVA to various non-current assets such as investments, deferred tax assets, property, plant and equipment, goodwill, intangible assets, and derivatives. It highlights the benefits of FVA, including accurate asset valuation and reduced manipulation, while also acknowledging limitations like market fluctuations and investor perceptions. The analysis concludes that FVA provides a more realistic reflection of a company's financial position, advocating for its continued use over HCA to provide investors with reliable financial information. The report emphasizes the importance of choosing the appropriate accounting method for organizational success.

Running head: FOUNDATIONS IN ACCOUNTING
Foundations in Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
IFRS Statement of Fair Value Accounting......................................................................................2
Fair Value vs. Historical Cost Accounting......................................................................................3
Benefits and Issues of Fair Value Accounting................................................................................3
Effects on Balance Sheet.................................................................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................9

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Introduction
Increasing number of accounting standards all over the world are allowing the standards
of Fair Value Accounting (FVA) for the purpose of financial reporting. The International
Financial Reporting Standard (IFRS) can be considered as one of them allowing FVA for the
accounting treatment of non-current assets of the companies (Graham, Carmichael &
Carmichael, 2012). It needs to be mentioned that IFRS have agreed on the application of FVA
for ascertaining the value of their non-current assets without involving the market value of them
over Historical Cost Accounting (HCA). While the main aim of the development of financial
statements is to reflect the reality of financial situation, variation in the accounting opinion can
be seen under the process of FVA and HCA. The main aim of this report is to ascertain whether
FVA should permanently replace HCA for the valuation of non-current assets. For the purpose of
this report, the 2017 Annual Report of Wesfarners is taken into consideration.
IFRS Statement of Fair Value Accounting
All the details related with the implementation of fair value measurement can be seen in
the IFRS Framework 13 Fair Value Measurement. According to this standard, all the business
entities under Australian Securities Exchange (ASX) need to use fair value measurement for the
measurement of the fair value of all of their assets including non-current assets. According to this
standard, the definition of faire value can be provided based on an ‘exit price’ notion and used
the hierarchy of fair value that results in market based measurement rather than any entity
specific measurement (iasplus.com, 2018). In this aspect, IFRS 5 Non-current Assets Held for
Sale and Discontinued Operation states the process of accounting treatment of non-current
assets. According to this standard, assets held for sales are not depreciable and they are required

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to be valued on the basis of fair value less costs to sell. Moreover, they are required to be
presented separately in the financial statements. In addition, there is a need for separate
disclosure for all these non-current assets (iasplus.com, 2018).
Fair Value vs. Historical Cost Accounting
There are major differences between FVA and HCA. It can be seen that FVA is regarded
as the improvement of HCA as the concept of FVA has been developed to overcome the
drawbacks of HCA (Chircop & Novotny-Farkas, 2016). Under the process of HCA, the initial
price paid at the time of purchasing any asset or liability only matters. The prices of the assets
and the liabilities in the balance sheet cannot include any fluctuations of price. However,
difference can be seen in case of FVA. FVA takes into account all the changes in the value of
assets and liabilities from time to time basis. Thus, it needs to be mentioned that the value of the
assets and liabilities reflect the correct market value under the process of FVA (Ayres, Huang &
Myring, 2017). From the above, it can be seen that the process of FVA takes into account the
volatility in the price of assets and liabilities where HCA does not consider this volatile in price.
This volatility make FVA superior to HCA as it provides the financial results of the companies
that are not based on possible subjective valuation or any other method (Ellul et al., 2015).
Benefits and Issues of Fair Value Accounting
It needs to be mentioned that the process of FVA has some major advantages. At the
same time, there are also some major limitations of FVA. They are discussed below:
Benefits

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 The use of FVA helps in providing the accurate valuation of the assets and liabilities of
the business organizations. FVA takes into account the increases and decreases in the
value of assets and liabilities. It helps in providing the correct financial position of the
company (Laux, 2016).
 Under the process of FVA, there is less possibility of doing manipulation with the
accounting data. Under FVA, the tracking of sales price is done based on the actual or
estimated value that helps in providing the measurement of true income (Zack, 2012).
 FVA helps in tracking the value of all types of assets where the valuation of assets and
liabilities is not always correct in case of HCA. For this reason, accountants all over the
world prefer the application of FVA (Wang & Zhang, 2017).
 FVA helps the companies by allowing the process of asset reduction within the market.
This particular aspect helps the companies in surviving in difficult economy (Bick,
Orlova & Sun, 2017).
Limitations
 Under the process of FVA, large fluctuations in the value of assets can be seen many
time in the year and this changes are required to be recorded in the financial statements.
This particular aspect affects the financial position of the companies (lorian Marcel
Nuţă, 2015).
 There are investors for the companies who do not notice that the company is using
FVA. This particular aspects create major dissatisfaction among the investors as they
can only seen the reduction in the net income. It can be considered as another limitation
of FVA (Liao et al., 2013).

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 Although it is crucial to consider the present value of the assets and liabilities, it is
necessary to have the historical record for measuring the accuracy. The loss of
historical aspect under FVA can be considered as a major limitation of FVA (Zyla,
2013).
Thus, from the above discussion, it can be seen that FVA has both benefits and limitations
and the accountants are required to consider all of these aspects while using FVA.
Effects on Balance Sheet
As per the earlier discussion, Wesfarmers Limited is considered for measuring the
superiority of FVA over HCA. From the 2017 Annual Report of Wesfarners, it can be seen that
there are some major items under non-current assets. They are shown below:
(Source: wesfarmers.com.au, 2018, pg. no: 96)
The first non-current asset is investments in associates and joint venture. From financial
note 18, page no. 127, it can be seen that the company measures and recognizes their investments
in the balance sheet at the cost price after adding the post-acquisition changes. It can be found in
IAS 1(54) (e) of IFRS statements. This calculation considers all the recent changes in the
investments under FVA.

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The next non-current assets are Deferred Assets. In the calculation of deferred tax assets,
the company follow the IFRS standard of IAS 1 (54) (o), (56). According to this standard, the
recognition of this asset is done in the date of balance sheet. It implies that the company consider
all the changes in the value of deferred tax assets while it would not be possible in case of HCA
(wesfarmers.com.au, pg no: 106).
The next non-current asset is property. According to IFRS IAS 1 (54) (a), while
measuring the cost of plant, Wesfarmers considers all the necessary changes in the value like
depreciation, impairment, cost of replacing parts and others. It implies the adoption of FVA by
the company (wesfarmers.com.au, pg no: 109).
The next non-current asset is Plant and equipment. Same like property, Wesfarmers use
IFRS standard IAS 1 (54) (a) for the valuation of their plant and equipment. In this process, the
company considers all the necessary changes in the value of this asset while reporting them in
the balance sheet. It indicates the adoption of FVA by the company (wesfarmers.com.au, pg no:
109).
The next non-current asset of Wesfarmers is Goodwill. In the financial note no. 8, it is
clearly stated that the company uses FVA for the measurement and reporting of their goodwill.
In this context, the company follows the IFRS principle of IAS 1 (54) (c). It implies that the
company takes into consideration all the current changes in goodwill (wesfarmers.com.au, pg no:
110). The next items are Intangible assets other than Goodwill. It needs to be mentioned that the
company uses the same standard for these assets (wesfarmers.com.au, pg no: 110).
The next non-current asset of the company is Derivatives. As per the financial note no.
16, it can be seen that the company uses fair value method for valuation of their derivatives on

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the date of their contracts and the company re-measures them on the basis of fair value. For this
reason, the company follows the standards of IAS 1 (54) (d) and IFRS7 (8) (a). It needs to be
mentioned that the company also use FVA in case of the measurement and valuation of hedging
instruments.
It needs to be mentioned that the values in the amounts of balance sheet have major
impact on the financial position of the business organizations as the investor largely reply on the
figures of balance sheet for determining the credit worthiness of the company (Graham,
Carmichael & Carmichael, 2012). For this reason, the financial statements including balance
sheet need to reflect the actual financial position of the companies. The same aspect is also
applicable for the financial statements of Wesfarmers. The above discussion denotes that the
company has complied with the regulations of IFRS in order to follow the principles of FVA.
However, in case Wesfarmers used HCA, there would be significant difference in the values of
non-current assets. Due to not taking into consideration the recent changes in the values of assets
under HCA, the value of the assets did not express the actual financial position of the company
and it would mislead the investors in the investment decision-making process.
Conclusion
The selection of appropriate accounting method is an important factor for the success of
the whole organization. In this process, business organizations are required to consider both the
advantages and disadvantages of the accounting methods. From the above discussion, it can be
seen that IFRS has provided all the details related to the use of FVA for the ASX listed
companies. According to the above discussion, it can be observed that the process of FVA has
both advantages and disadvantages, but the portion of advantages is more than the portion of

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disadvantages as compared to HCA. In case of Wesfarmers, the above discussion indicates that
the company uses FVA method for the valuation and presentation of their non-current assets in
the financial statements. The above discussion shows that in case of the adoption of HC instead
of FVA, there would be major differences in the values of non-current assets; and this would
lead to the miss-presentation of the financial position of Wesfarmers. This whole process would
mislead the investors in determining the actual financial position of the company. Thus, on the
basis of the whole discussion, it can be concluded that FVA should permanently replace FVA as
the accounting process of the companies.

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References
2017 Annual Report. (2018). Wesfarmers.com.au. Retrieved 27 March 2018, from
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0
Ayres, Huang, & Myring. (2017). Fair value accounting and analyst forecast accuracy. Advances
in Accounting, 37, 58-70.
Bick, Orlova, & Sun. (2017). Fair value accounting and corporate cash holdings. Advances in
Accounting, Advances in Accounting.
Chircop, & Novotny-Farkas. (2016). The economic consequences of extending the use of fair
value accounting in regulatory capital calculations. Journal of Accounting and
Economics, 62(2-3), 183-203.
Ellul, A., Jotikasthira, C., Lundblad, C., & Wang, Y. (2015). Is Historical Cost Accounting a
Panacea? Market Stress, Incentive Distortions, and Gains Trading. Journal of
Finance, 70(6), 2489-2538.
Graham, Carmichael, & Carmichael, D. R. (2012). Financial accounting and general
topics (12th ed., Accountants' handbook ; v. 1). Hoboken, N.J.: John Wiley & Sons.
IFRS 13 — Fair Value Measurement. (2018). Iasplus.com. Retrieved 27 March 2018, from
https://www.iasplus.com/en/standards/ifrs/if
IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations. (2018). Iasplus.com.
Retrieved 27 March 2018, from https://www.iasplus.com/en/standards/ifrs/if

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Laux, C. (2016). The economic consequences of extending the use of fair value accounting in
regulatory capital calculations: A discussion. Journal of Accounting and
Economics, 62(2-3), 204-208.
Liao, Kang, Morris, & Tang. (2013). Information asymmetry of fair value accounting during the
financial crisis. Journal of Contemporary Accounting & Economics, 9(2), 221-23
lorian Marcel Nuţă. (2015). FAIR VALUE ACCOUNTING CRISIS DEBATE – A
REVIEW. Analele Universităţii Constantin Brâncuşi Din Târgu Jiu : Seria
Economie, 2(1), 136-139
Wang, & Zhang. (2017). Fair value accounting and corporate debt structure. Advances in
Accounting, 37, 46-57.
Zack, G. (2012). Fair Value Accounting. In Financial Statement Fraud (pp. 117-128). Hoboken,
NJ, USA: John Wiley & Sons.
Zyla, M. (2013). Fair value measurement practical guidance and implementation (2nd ed.,
Wiley Corporate F&A). Hoboken, N.J.: Wiley.