Arguments For Common Set Of Bookkeeping Standards And Choice Between Fair Value And Historical Cost Accounting

Arguments for Common Set of Bookkeeping Standards

Discuss about the Convergence of Accounting Standards System.

The report outlines the arguments for the common set of bookkeeping standards and the forces that has resulted in the adoption of the international financial reporting standards. The merging of the accounting standards denotes to the one objective of creating a solitary set of accounting standard among the US GAAP and IFRS. The paper will also outline the choice amid the fair value and historical cost accounting since it has been long considered as the long standing controversy among the accounting researchers and controllers. Even though both the approaches are largely used by companies in determining their proceeds and fiscal position there prevails a disagreement over the superiority of the two methods.

According to Newman (2013) having a universally since accounting standard is not only important for the occupation of accountancy nonetheless also for the global economy. A strong monetary reporting structure that is assisted by higher quality bookkeeping and principles of audit, supported by strong supervisory, supremacy and moral framework is necessary for financial growth. Investors would not trust in the financial info except it has the supporting and financial activity. This can necessarily take place at the countrywide level but there is an increase in benefits if the principles are world-wide. Shareholders and moneylenders would be much more open to perform business activities cross borders. This is only possible if the investors are able to depend on financial information depending upon one single set of standards familiar to investors.

Research carried out by Tarca (2012) stated that following the crisis of 2008, CFOs of Malaysia, Singapore, Hong Kong and China have strongly backed the adoption of IFRS on the belief that it would add value to the capital markets of Australia. The single set of accounting standard would help in facilitating single comparability for investors from western regions and would enable them with principle based approach. The activities of cross border mergers and acquisition and strategic investment are enabled whereas the national regulator can work collectively and create supervisory practices that are more closely aligned.

On the other hand, a conceptual framework is viewed as the analytical tool that have numerous variations and contexts. Having one conceptual framework is considered essential perquisite for the joint standards. The purpose of having one conceptual framework is to eliminate the current variances among the two structures to seal in the gaps and create developments where appropriate.

The Choice Between Fair Value and Historical Cost Accounting

According to Jain, Nair and Khan (2013) the expansion of conceptual framework would explain the current cultural variances. The IFRS has composed a framework and explanations. The IASB is directed by the conceptual framework in the expansion of the forthcoming principles and the evaluation of the current IFRS. The conceptual framework lay down the perceptions which underlines the preparation and exhibition of the fiscal reports for the outside users. Having a one set of conceptual framework helps in avoiding the conflict of interest. On the prevalence of conflict amid conceptual framework and any necessities of IFRS earnings precedes over the conceptual framework.

Critics have argued that shifting to a single set of accounting standard has several advantages but also have some disadvantages. There is some small business that uses a perfectly good system of accounting and would be required to sustain an additional cost to alter the new system bookkeeping. According to Christensen et al. (2015) even though the standard of accounting would be standardized across nations but the law and order would not. As a result of this, it may obstruct the comparability of the monetary reports across nations even though similar bookkeeping structure is used. To such a degree the rules and principles may vary, small business may have the incorrect sense of safety regarding the real likeness among the options for investment.

Critics to the conceptual framework have bought several arguments that IFRS does not have conceptual basis (Zhang and Andrew 2014). This is because of transition. It is largely because of expensive alteration from one system to another. There are clear monetary costs of setting up the new system but it is correspondingly vital in adjusting the expenses of adopting to the use and understanding the new data.

Nyor (2012) argued against having a globally accepted one conceptual framework. The conceptual framework of accounting introduces a lot of rigidity. The conceptual framework is inflexible and encouraging, therefore integrating new ideas to it is problematic. There is constantly a struggle of among the previously created bookkeeping principles and conceptual framework. Standards that are established vary from the basic principles of conceptual framework.

A large amount of accounting principles are allowing and also demanding the practice of fair value accounting for the purpose of financial reporting. The IASB and FASB have settled to world-wide unvarying accounting structure which creates the customary description of the fair value that is appropriate in ascertaining the net worth of assets and liabilities without including market value (Jaijairam 2013). Of late there has been considerable disagreement over the usage of the fair value accounting in contrast to the method of historical cost accounting.

Criticism of Fair Value Accounting

Under the fair value accounting an organization can reset the amounts of the specific assets on its balance sheet each quarter to reveal the alterations in the market price. According to Jaijairam (2013) fair value increases the constancy and comparability in the measurement of fair value. The primary argument for fair value bookkeeping is that it delivers a correct asset and estimation of liability on the continuous base to the financial information users. On the benefit side the fair value accounting appears to be superior than the historical cost. When it is assumed that prices of the assets or liability increases or it is anticipated to raise the company marks up to the fair value of the asset and liabilities to the present marketplace value to illustrate what it would have received if the asset is sold or would have to wage in order to relive themself from the liability (Christensen and Nikolaev 2013). Unlike historical cost accounting, the fair value accounting restricts the ability of the organization to probably limit the potentiality of manipulation in its reported net income.

There are situations where the management may try to manipulate the value of certain assets. For example, the management may use profits or loss from the sale of asset to expand or contract the net income as stated in its anticipated time. By employing the use of fair vale accounting gains or loss arising out any change in price for the asset and liability are reported in the phase in which they take place (Bessong and Charles 2012). The rise in the value of asset may decrease the liability value but enhances the net income or reduction in the asset value or rise the value of the liability with reduced net income.

In spite of the several benefit fair value accounting faces criticism as well. The financial statements can be manipulated by the management as they may decide to charge other than temporary impairment in a single quarter. Such action means that the asset of the organization is undervalued (Smith and Smith 2014). Fair value accounting can present as the challenge to the company and users of the reported monetary information. There are circumstances in the market where certain assets and liabilities that are dealt might vary frequently and turn out to be volatile on certain situations.

As stated by Easton and Zhang (2016) application of the fair value accounting, businesses reassess the present worth of the certain assets and liabilities even under the unstable market situations, possibly resulting in large fluctuations in the those assets value and liabilities. However, upon the stabilization of the market situations changes in the value may result in their previous normal levels. This makes that the reported losses and temporary gains under fair value accounting may provide misleading information during that time.

Conclusion

Critics have argued that fair value accounting may create an impact on the market adversely (Barth and Landsman 2018). For example, an asset is revalued downwardly due to the fall in the present market trading prices. The lesser worth of the asset may cause bigger selling of the asset at a highly low price. Several organizations are yet opposing the fair value accounting due to its pro-cyclicality and other related market flaws.

Conclusion:

Even though the word is uncharted territory with the globalization of business successful overseas operations would help in rebuilding accounting image. The recent achievements for IASB are considered reasonable but the official acceptance or acknowledgement of the IFRS requires open conference of thoughts about the single set of accounting standard. On the other hand, selecting an appropriate method of accounting is difficult there are certain rewards and drawbacks of fair value method and historical cost method. Though historical cost method is considered easy to comprehend but it is an obsolete and emphasis on cost allocation instead of value determination of asset. On comparing issues and advantages fair value accounting is considered superior than historical cost accounting.

Reference List:

Barth, M.E. and Landsman, W.R., 2018. Using Fair Value Earnings to Assess Firm Value.

Bessong, P.K. and Charles, E.F.F.I.O.N.G., 2012. Comparative analysis of fair value and historical cost accounting on reported profit: a study of selected manufacturing companies in Nigeria. Research journal of finance and accounting, 3(8), pp.132-149.

Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Easton, P. and Zhang, X.J., 2016. Mixing Fair-Value and Historical-Cost Accounting: Predictable OCI and Mispricing of Bank Stocks.

Jaijairam, P., 2013. Fair value accounting vs. historical cost accounting. The Review of Business Information Systems (Online), 17(1), p.1.

Jain, D., Nair, K. and Khan, H., 2013. Convergence of Accounting Standards to International Financial Reporting Standards.

Newman, N.F., 2013. One Worldwide Set of Global Accounting Standards-HMM. Hastings Bus. LJ, 10, p.37.

Nyor, T., 2012. expected benefits of implementing global accounting standards by Nigerian business entities. International Journal of Business and management, 7(15), p.98.

Smith, S.R. and Smith, K.R., 2014. The journey from historical cost accounting to fair value accounting: The case of acquisition costs. Journal of Business and Accounting, 7(1), p.3.

Tarca, A., 2012. The case for global accounting standards: Arguments and evidence.

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.