Analysis of Fair Value Accounting in Corporate Finance

This report provides an in-depth analysis of fair value accounting, examining its relevance, advantages, and criticisms within the context of corporate finance. It begins by defining fair value accounting and explaining its role in asset and liability valuation, contrasting it with historical cost methods and discussing its implications for financial reporting. The report then delves into the accounting practices of two major Australian companies, Woolworths and Wesfarmers, to illustrate the practical application of fair value accounting. It analyzes how these companies measure revenue, financial instruments, goodwill, and other key financial elements using fair value principles, referencing relevant accounting standards such as AASB 9. The report also examines the specific methodologies used by each company, including the use of level 1 fair value hierarchy for financial instruments, and how they account for items like trade receivables, loyalty programs, and debt instruments. The report concludes by summarizing the key findings and comparing the approaches of Woolworths and Wesfarmers, highlighting similarities and differences in their application of fair value accounting.

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Part A:
Relevance of fair value accounting:
This is the one wherein an asset or a liability is capable of being exchanged in the market at
its existing transaction price between the knowledgeable and the parties that are not related
with one another. This method is used for the purposes of estimating the price of the product
or a service when there is no actual transaction for that asset or the liability. Thee main aim of
the stated fair value is the fact that the exchange price of the asset or the liability is well
defined and the same is reported in the financial statements at it’s current value. Hence in the
nutshell, the fair value is the amount that is exchanged between the two parties that are not
connected with each other but this is the price which depends upon the value in use for the
entity. In order to illustrate, the value of the swap derivative to the bank is equal to the price
which incurred to sell it and this value of the swap does nor depend upon the assets and the
liabilities that are in existence as in the balance sheet. This Mark’s as a very strong
assumption for the purposes of
measurement of the various assets and the liabilities that are incapable of being traded
(Georgiou, 2017).
This method is criticised on many grounds. The various model of accounting pertaining with
the accounting goes much way beyond the scope of the financial instruments and the banking
sector. There are accounting standards that are related with the various business combinations
along with the calculation of the amount of the depreciation which extends to the depreciable
assets. This is connected with the companies that are of certain sizes. This change in the
accounting concept relates to the changes in thee core function or the framework which forms
the very basis of the future standards of IFRS. This is a new concept of accounting concepts
that not only needs the adjustment of the financial communication which is to be made along

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with the analysis of the various practices that are being followed but this also needs the
redefining of the respective roles of the statement of financial accounts. The setters and the
relevant authority of the accounting standards are looking for the ways through which the
relevant accounting information could be made in line with the accounting numbers, the
indicators of the management and the company value. The debate over the use of the fair
value accounting is far from over and there is a need of questioning the purposes of the
financial statements and the ways in which the same could be used. An advantage of the same
is the fact that these discussions are very much beyond the technical consideration of the fact
that the use of historical cost serves to be a much better method of valuation along with the
various underlying economic issues ("Fair value accounting", 2019)
Also, in the light of the current financial constraints that the company faces today. This
method need not be blamed for the purposes of the economic downturn. The root cause of the
issues is the fact of financial reporting. This concept uncovered the unhealthy practises that
were being followed by the company and this helped in revealing the healthy from the
unhealthy companies. The measurement of fair values helps in the process if allocating the
scarce resources that the company might have. This could be said in the light of the fact that
the fair value measurement helps in the accelerating of the prices and the allocation of the
resources of the process of adjustment which helps in achieving financial stability for the
company. The fair value is the market price that meets the different expectations of the
participants in the market about the future demands and the supply of the products and the
services (Landsman, 2005). Hence, the determination if the market prices plays a very vital
role when it comes to the smooth functioning of the economy as a whole. This concept is not
directly connected with the fall of the financial crisis but there are many issues that needs to
be taken care of. Ta classic example of the same is the valuation of the financial instruments
that qualifies for the level 3 fair value hierarchy. This is the valuation hierarchy that has an

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unobservable market inputs. The fair values determined through the use of this method
cannot be verified from the outside and hence are considered to be less reliable and are less
reliable than usual (Emerson, 2010).
Part B:
Woolworths:
The first company undertaken for review if Woolworths limited.
Woolworths Limited has prepared the financial statements on the basis of historical costs. But
this is with an exception that the assets of the company have been reported at their fair values
and the revaluations have been done through the financials. The company also values its
derivative assets and the liabilities based upon their respective fair values and the same has
been explained in the accounting policies.
In terms of revenue, the company has measured it using the amount of the values that has
been received or is receivable by the company. Further, the company records the revenue
when the conditions pertaining with the relevant accounting standards have been met. AASB
9 deals with the financial instruments and this is being replaced by the new accounting
standard 139 that deals wit the financial instruments. In respect of the recognition and
measurement, the company has adopted the new model of calculating the impairment for the
financial assets and the same have been measured through the statement of financials for
some of the instruments of debt.
In respect of the trade and other receivables, these have been recognised on the basis of their
respective fair values and then are amortise during the cost basis using the method of
effective rate of interest. This is in allowance of an impairment. This has the general term of
about 30 days.

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In terms of the listed equity securities, these have been reported as the financial assets of the
company and are measured through the statement of comprehensive income and are
measured at their fair values. These are the investments that were measured at their respective
fair values and then were measured at their fair values with any amount of change being
reported in the statement of comprehensive income. When these assets are disposed of, then
the cumulative amount of the gain or the loss arising from such transactions are transferred to
the equity account.
The amount of the goodwill shows the amount over the net fair value of the assets or the cost
of the acquisition which exists over the fair value of the shares of the assets that are
identifiable. The following of this recognition criteria, the amount of the goodwill is reported
at the cost less any amount of the loss on impairment.
With regard to the calculation of the recoverable amount, this amount pertaining to the asset
shall be estimated on the basis of the determination of the impairment loss of that asset. The
amount that can be recovered from the asset is more than the value in use of the asset and the
fair value of the asset less the costs of disposal. Further, where an asset is not capable of
generating the cash inflows independently, then the recoverable amount shall be reported for
the cash generating unit, which forms the smallest group of the assets that generates the cash
inflows and which is not dependent upon the other cash generating units that are likely to
derive some benefit from the business combination that has risen fie to the goodwill that has
been determined.
The reserve kept aside for hedging consists of an effective portion and amount of the
cumulative net changes that takes place in the market value of the hedging of these
instruments which is connected with the transactions to be hedged that have not yet taken
place. This is the cumulative amount of the deferred gain or the loss on which hedge has been

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reported in the statement of consolidated statement. This provision is applicable with the
relevant accounting policies of the company.
The amount of the remuneration reserve is the one that consists of the fair values of the plans
of the share based payments that have been reported in the statement of profit or loss
("Annual report 2018", 2019).
Wesfarmers Limited:
The second company undertaken for review is Wesfarmers Limited.
The financials of the company have been prepared using the historical costs for the annual
accounts. This is not applicable for the investments that have been held by the associates for
some of the other financial instruments that have been measured at their fair values. The
carrying values of the assets that have been recognised along with of the liabilities comprise
of the items that have been hedged in terms of the fair values. Otherwise, these would have
been reported at their respective amortised costs and such is the change which has been
adjusted using the amounts of the values that are connected with the various risks that have
been hedged.
The amount of the revenue has been measured at the fair value of the consideration which has
been received or is receivable.
In respect of the key estimates, the company has one loyalty program that allows its
customers to accumulate the points as and when they purchase the products of the company.
These are the points that are then redeemed for the products. But this is subject to the points
that have been obtained. The amount of the money that is received in respect of such
transactions are segregated between the products that have been sold and the points that have
been issued. The fair value of the points are then considered to be deferred and is then
recognised as revenue as and when these points are redeemed. As at June 30, 2018, the

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company has the revenue to the amount of $308 million in relation with the loyalty program
which stood at $267 million during the eyar 2017. Any amount of change in this estimate is
not likely to have any material impact over the financials of the company.
The amount of the trade receivables of the company takes the time of baoutv30 days. These
are reported at their respective fair values and then these are reported at their amortised costs
by the way of using the effective interest method less any amount of impairment expense.
The amount of the goodwill which has been reported in the financials are measured at costs.
This is measured as being the cost of the business combination less any amount of the net fair
value of all of the identifiable assets, liabilities and the contingent liabilities. The amount of
the goodwill is reported at cost less any amount of the accumulated loss on impairment.
All of the intangible assets have been reported at their respective costs and after that, they
have been reported at the fair values as on the date of the acquisition. The financial assets
reserve of the company reports any amount of changes in the financial assets through the
statement of income.
With regard to the debt pertaining with the capital market, the company has foreign and
domestic bonds. All of the loans and the borrowings have been reported at their respective
fair values less any amount which has been incurred as costs for the company ("Annual report
2018", 2019).
In the nutshell, both of the companies undertaken for review have been using somewhat
similar accounting concepts and policies when it comes to the fair value measurement.
Woolworths has been using the fair value measurement concept for the purposes of
measuring its financial instruments. It employs the following techniques:

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Level 1 for the method of determining the market values of the assets and the liabilities from
the quoted prices
Level 2 inputs for the purposes of valuing the assets or the liabilities other than the quoted
prices
Level 3 inputs to measure the assets or the liabilities which are not based upon the observable
market data
Further, Wesfarmers uses the above mentioned valuation techniques for the purposes of
valuing the financial instruments reported in its financials.

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References
Annual report 2018. (2019). Retrieved from
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf
Emerson, D. (2010). Fair Value Accounting: A Historical Review Of The Most Controversial
Accounting Issue In Decades. Retrieved from
https://www.researchgate.net/publication/267968449_Fair_Value_Accounting_A_Histor
ical_Review_Of_The_Most_Controversial_Accounting_Issue_In_Decades
Fair value accounting. (2019). Retrieved from https://halshs.archives-ouvertes.fr/halshs-
00170461/document
Georgiou, O. (2017). The Worth of Fair Value Accounting: Dissonance between Users and
Standard Setter. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-
3846.12342
Landsman, W. (2005). Fair Value Accounting for Financial Instruments: Some Implications
for Bank Regulation. Retrieved from https://www.bis.org/events/armpr05/landsman.pdf
Annual report 2018. (2019). Retrieved from https://www.wesfarmers.com.au/docs/default-
source/reports/wes18-044-2018-annual-report.pdf?sfvrsn=4