Financial Accounting For Fair Value: Evaluation Of Issues And Relationship To Decision Making

Evaluation of Issues in the Context of AASB/ IASB

Discuss about the Financial Accounting for Fair Value.

Measurement of financial information for preparation and presentation of the annual report should be done as per the principles of accounting standard AASB 13 on fair value measurement. The standard requires the organizations to follow the fair value method for recognizing the business transactions with respect to assets and liabilities. As per AASB 13, fair value is the value of asset or liability available as per the current market situation at the recording date (Bond, Govendir & Wells, 2016). In order to measure the fair value of the financial components the organizations need to consider the principal market or most beneficial prevailing market. On the contrary, IASB presents the conceptual framework for recognizing the financial information for reflecting the relevant, justified and avoidance of unnecessary changes. However, organizations experience several issues in following the accounting measurement as per fair value method AASB 13. One of the major issues in adopting the fair value method to measure the value of asset and liabilities is pre- empting price values. Since the fair value is generally available for the assets at the time of sale or disposal, it is difficult to evaluate the price at the time of acquiring the same (Zhou, Birt & Rankin, 2015).

In case of Westfield Corporation, the value of plant and equipment recognized in the year 2016 according as per the written down value of the assets determined in the previous year amounted to US$34.8 million. According to the financial information, plant and equipment is considered as non-financial fixed asset that is required to be recorded at fair value. Besides, it is difficult to determine the accurate and reliable value of the non- financial assets if the fair value method is being followed (Zhuang, 2016). Another issue on measuring the financial information as per the requirements of AASB/ IASB is the use of appropriate model for the tangible and intangible asset. Since there is lack in clear information on market assumptions for measuring the fair value it is difficult to use the appropriate model for each of the non- current assets. For instance, in case of investment, derivative assets and receivables it is easy to measure the fair value as per AASB but for the purpose of Goodwill, plant, machinery and equipments it is difficult to acquire the reliable value as per prevailing market price (Magnan, Menini & Parbonetti, 2015).

Relationship Between the Measurement Employed and Provision of Decision Useful Information

Since the AASB and IASB are not parallel with other accounting frameworks like FASB of USA, it is difficult to recognize and disclose the financial information for the purpose of preparation of annual reports. In case of Westfield Corporation, the accounting report reflects the value of assets and liabilities as per the required accounting policies but it is difficult to measure all types of accounting elements using the same accounting models (Goh et al., 2015). Observing the annual report of the company, it has been determined that the management used other standards as exception to determine the appropriate value of financial sources. Another important issue on adopting the fair value method is the appropriate selection of market to avail the correct prevailing price of the assets or liabilities. Westfield’s prevailing non- current assets comprises of investment properties, equity investments, property investments, derivative assets, plants and equipments that require different accounting methods. Therefore following the fair value method for each of the assets is not feasible due to transaction cost, initial measurement value and selection of appropriate market (Müller, Riedl & Sellhorn, 2015).

In addition to this, adoption of fair value method for recognition of financial information creates issues in the process of auditing. Adoption of fair value method requires critical evaluation of appropriate market, and relative prevailing price for exit value. Therefore, it is difficult in the process of audit to verify the correctness and reasonableness for the measurement of business assets and liabilities (Chauvey et al., 2015). The process involves time consuming, increased cost to carry the audit procedures and to ascertain the actual and reliable evidences to measure the correctness of the accounting reports of the organizations. In the annual report of Westfield Corporation, it has been noticed that the assets and liabilities had been recording as per the ASSB requirements and principles. However, there is certain information that required different accounting standard as an exemption to determine the accurate and comparable values. Therefore, in the process of audit it is difficult to analyze the reasonable evidence for verification of the correctness of the adopted methods in the financial reports of the organizations. Hence, it can be said that adoption of fair value method as per AASB 13 and IASB reflects several issues on accuracy and reliability of the valuation of business assets and liabilities (Dagiliene, 2015). 

It is important to follow requisite accounting policies for preparing and presenting the annual reports to reflect the true and fair view to the stakeholders. Accounting reports are prepared to determine and measure the financial performance of the organizations for accounting years that helps in undertaking significant business decisions. Apart from that, it also helps in taking investment decisions for the business organization as well as for the investors (Martínezâ€ÂFerrero, Garciaâ€ÂSanchez & Cuadradoâ€ÂBallesteros, 2015). Assets and liabilities of the organizations represent the financial position therefore it is important to measure the values with appropriate methods that disclose the reliable and accurate results. The annual report of Westfield Corporation is prepared by adopting the principles of AASB and IASB for recognition of costs and expenses as well as assets and liabilities. Additionally, it is essential to present the necessary disclosure about the accounting methods used by the organization, disclosure of change in accounting methods, sources and effect in value (Chen, Miao & Shevlin, 2015).

Reference List

Annual report of the organization represents significant information in earning capacity, rate of return at par to the expectations of the investors, dividend payment ratios and ability to meet the liabilities and obligations. Therefore, it is the responsibility of the management to adopt the appropriate methods to reflect the reliable information to the users of the annual report. In case of Westfield Corporation, the management adopted the fair value method to record the value of plant and equipment as per AASB, which would reflect the company’s current value of sources available to finance the liabilities (Demerjian, Donovan & Larson, 2016). For instance value of total assets if compared and measured with the relative terms, the resulted ratios reflects the efficiency of the company to employ its sources of funds. Considering the recent annual report of Westfield Corporation, asset turnover ratio is 0.05 that presents the efficiency of the company to manage its asset resources in generating the revenue for business. As per the standard rates higher asset turnover measures the higher efficiency of the company to generate sales by using its fixed asset sources (Bratten, Causholli & Myers, 2015).

Other important information that the accurate and reliable accounting information discloses is the debt to total asset ratio of the company. It represents the percentage of the organization’s asset being used to finance the debt component and determines the business risk. It is measured by using total liabilities and total debts of the organization in a financial year representing maximum fund for acquisition of asset is by using the debts if the ratio is greater than one (Müller, Riedl & Sellhorn, 2015). However, if the ratio appears to be lower i.e. less than one then it represents the fund used to acquire the assets are from equity capital. Westfield Corporation’s debt assets ratio in the current financial statement reflects 0.75 that is less than 1.00 as per the standard ratios in the industry. It explains that the Westfield’s assets are mostly funded by the equity component rather than debt component (Bond, Govendir & Wells, 2016).

Accordingly it is essential to measure the elements of financial information by following the fundamental accounting principles that represents the reliable, accurate and useful information to the stakeholders. Revenues of the organization should be recorded on prudence basis and only if there is satisfaction in performance obligation (Magnan, Menini & Parbonetti, 2015). Further, in case of production costs and other business expenses the accounting method should be on accrual basis that enables a company to reflect true and fair view of the business performance. In case of assets and liabilities organizations are required to follow the measurement using fair value method as per AASB 13 to present the prevailing market realizable value. Westfield’s assets and liabilities have been recorded by following the principles of AASB/ IASB yet there are certain issues that the management has to consider. Fair valuation of business and financial information helps in taking the investment decision, capital retention, payment to shareholders, business expansion or product diversification decisions (Dagiliene, 2015). Besides it provides useful information to the investors for the purpose of investment in securities of the company. Therefore it is important to maintain the employed measurement of accounting policies along with the provision of useful information in the annual report for making correct decisions.  

Reference List

Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance.

Bratten, B., Causholli, M., & Myers, L. A. (2015). Fair value accounting, auditor specialization, and earnings management: Evidence from the banking industry. Auditor Specialization, and Earnings Management: Evidence from the Banking Industry (May 2015).

Chauvey, J. N., Giordano-Spring, S., Cho, C. H., & Patten, D. M. (2015). The normativity and legitimacy of CSR disclosure: Evidence from France.Journal of Business Ethics, 130(4), 789-803.

Chen, S., Miao, B., & Shevlin, T. (2015). A new measure of disclosure quality: The level of disaggregation of accounting data in annual reports.Journal of Accounting Research, 53(5), 1017-1054.

Dagiliene, L. (2015). The research of corporate social responsibility disclosures in annual reports. Engineering Economics, 21(2).

Demerjian, P. R., Donovan, J., & Larson, C. R. (2016). Fair value accounting and debt contracting: Evidence from adoption of SFAS 159. Journal of Accounting Research.

Goh, B. W., Li, D., Ng, J., & Yong, K. O. (2015). Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis.Journal of Accounting and Public Policy, 34(2), 129-145.

Magnan, M., Menini, A., & Parbonetti, A. (2015). Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), 559-591.

Martínezâ€ÂFerrero, J., Garciaâ€ÂSanchez, I. M., & Cuadradoâ€ÂBallesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management,22(1), 45-64.

Müller, M. A., Riedl, E. J., & Sellhorn, T. (2015). Recognition versus disclosure of fair values. The Accounting Review, 90(6), 2411-2447.

Zhou, T., Birt, J., & Rankin, M. (2015). The value relevance of exploration and evaluation expenditures. Accounting Research Journal, 28(3), 228-250.

Zhuang, Z. (2016). Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), 289-294.