Question

The Conceptual Framework and International Accounting Standards reflect the gradual shift from the traditional historical cost accounting towards fair value measurement. The proponents of Fair Value Accounting (FVA) have presented its merits over Historical Cost Accounting; however concerns have been voiced by many, including developing economies of the Pacific, with regards to the difficulties in the adoption of FVA. Discuss the role of FVA in promoting relevance and reliability in accounting measurements and using a case from a local context depict whether FVA is accepted and widely used in the World. To answer this question specifically state the follwoing:

a.) Research Objective ie Rationale (main Problem or issue and using a accounting theorical application)

b.) Problem Statement broken down into 5 objectives.

Answer 1

The Fair-Value Accounting (FVA) and Historical Cost Accounting (HCA) play a vital role in the field of accounts. FVA is considered as a clear concept. It provides current information about financial assets and liabilities, consistent with market whereas increasing transparency and encouraging rapid corrective actions. Since FVA reflects current market conditions, it provides comparability of the value of financial instruments bought at different times. In addition, financial disclosures that use fair value provide investors with insight into prevailing market values, further helping to ensure the usefulness of financial reports. It seems that the primary criteria used to discriminate between FVA and HCA are the different typologies of economic contexts and finance.

Difficulties in the adoption of FVA:-

a. Frequent Changes:-

In the markets, an item’s value can change abruptly. This leads to major swings in a company’s value and earnings. Accountants typically write off losses on items against a company’s earnings.

b. Less Reliable

Accountants may find FVA less reliable than HCA. For example, accountants typically look to the market when finding a new value for assets or investments. When an item has different values in different regions, however, accountants must make a judgment call on valuing items on the books

c. Inability to Value Assets

Businesses with specialized assets or investment packages may find it difficult to value these items on the open market. When no market information is available, accountants must make a professional judgment on the item’s value

d. Reduces Book Value

A company’s book value is the total of all assets owned. Historically, a company’s book value changed when a company purchased new assets or disposed of old assets.

It takes into account following objectives:-

• Distribution and replacement costs
• Supply or Demand
• Risk Characteristics
• Cost of Capital
• Individually Perceived Utility