Accounting Revaluations And Earnings Management

Discussion

Discuss about the Accounting Revaluations and Earnings Management.

According to AASB, (2013), the fair value of the accounting practice is based on the conceptualization of fair price. According to the accounting concept and economics, the fair value accounting is considered as the value of any form product, asset or service. These are based on the reasonable, the estimation based on an impartial approach of the prospective value of the market, and the item acquired for a specific period. The measurement of the value of is dependent on the factors such as substitution, manufacturing and acquisition of the item. The fair value accounting concept also considers the value of the alternatives, which are the losses in the nature. It is also based on the utility and the production capacity of a particular item at a certain period. Then fair value is also estimated on the supply and the demand situation of in a given time. It also considers the risk factors in the various types for the accounting values. Moreover, the fair value concept of accounting also considers the cost of capital and the utility of personal recognized assets (Hu, Percy & Yao 2015).

The Global financial crisis is observed as the period of the lost desirables of the properties due to the absence of the process for the different sources of the active markets. This in particular has made the system more complicated in nature for the determining of the fair values. Thus, it is evident that the modification pertaining to the rules needs to be implemented for further modification. Although it has been observed that the fair value accounting did not have any sort of negative impact on the GCF as it is observed to provide the investors by furnishing the necessary details on the subprime positions of the company (Greenberg et al., 2013).

For the purpose of this discussion, BHP Billiton Limited has been selected. With respect to fair value accounting in the mining industry, it has been observed that this particular industry is capital intensive in nature. It has been observed that this particular industry has high amount of noncurrent assets, as per the recommendations given by IFRS this type of business should involve itself to revalue its assets frequently. As per the guidelines given by IFRS, the nature of business involves risk of impairment losses, possibility of gain by devaluation and huge capital through the evaluation of assets. The fair value consideration is particularly useful for considering the impairment in the various parameters, which come into existence of the topic (Beisland & Frestad 2013). Moreover, for the evaluation of the processes in this particular industry, IFRS has highlighted on the issues related to IFRS 6 of “Exploration and Evaluation of Mineral Resource”. This particular regulation has clarified the different processes related to exploration and evaluation related to detection of mineral resources for obtaining legal authority for exploration in a particular region and at that meant of commercial feasibility of the resources (Smith & Smith, 2014).

Conclusion

As stated by Demerjian et al., (2016), The concept of fair value accounting is based on “three-tiered hierarchy” , which states the first level assets signifies the most accurate measurement of the fair values in active market. The second level assets are categorized as those assets where there is an absence of active markets and the distinguishable prices are unutilized in nature. The third level assets are categorized as those assets where there is absence of any significant input and the reason it is done using internal models and anticipation methods of the valuation process (Palea, 2014).

The different types of pros and cons of this particular industry seen in different fields of application of fair value with an augmented focus on the considerations made due to global financial crisis. The pros of fair value accounting are advocated through the reduction in the misstatements pertaining to different types of accounting entries, which leads to accurate information. The business of this particular nature segregated to follow the disclosures and the requirements, which have been discussed in IAS 16 property, plant and equipment, act or as stated in IAS 38 act of intangible assets. The limitation of the conservation of historical price issues can be solved by the treatment of fair value accounting method. As per the AASB 13 guidelines, fair value accounting is particularly useful when the real times and the relevant valuation are required from beforehand for both non-transactional and transactional processes. In terms of the presentation of material financial information the concept of fair value is of paramount importance for maintaining transparency, neutrality and maintaining integrity in the presentation of financial report of the company.

The cons of fair value accounting are seen in its dependency on the market values in terms of the revaluing of assets. This evaluation can create immense amount of fluctuation and changes in the market price. Additionally this can result in a negative image of the company where the business shows a fall in the value of the assets (Lee & Park 2013). The application of this method can show company is responsible for displaying stability in the financial statement after every session or fall in the market prices; this is not only unethical as per the practices of AASB but also untrue in nature. In various cases, the role of this method has shown negative repercussions particularly on the global financial crisis in 2008.

It has been observed that the strategic report of the BHP Billiton clearly mentions about the changes on the derivatives related to fair value. The annual report of the company further states that a good understanding of both the technical requirements and intrinsic values of the individual customers is reflected through the fair value of the products said by BHP Billiton Limited. As per the annual report of the company, the remuneration given by the company at present the company produces more than 41% from the face value of the fair value amount. It further states that the individual advisor of the committees calculates the amount and these are termed as the Kepler Associates by the company. The company report further states that the fair value does not take into consideration the forfeiture of the conditions on the awards. In the annual report of the company, it has been observed that BHP Billiton Limited is responsible for using fair value for long-term incentive scheme. As per the scheme, the fair value computation is done by multiplication of the face value by the word and fair value factor of 41% of present design of the plan as evaluated by the Kepler Associates of the company. The company has further declared that share-based payments are in accordance with AASB and the amortization of the fair values equity and instruments as such have been granted to the executives of the company either as per financial year 2015 or 2014. In the annual report of 2015, BHP Billiton has clearly declared that the fair value change in the derivatives included a loss of USD 107 million that was unrealized in the previous years (Bhpbilliton.com, 2016).

As it has been previously discussed about the various levels of the categorization of fair value treatment, the measurement of fair value at BHP Billiton limited is considered as a level 3 fair value. This is considered based on the input values used in the fair value measurement of the company. It has been further shown that the deferred tax balance of the company includes a composition of nontax depreciable adjustment related to the fair value. The net finance cost of the company includes the fair value change on the hedged loans, non-hedging derivatives and hedging derivatives. Some of the other financial risk management has been shown by the present practice of fair value in cross currency and interest rates types, commodity contracts, derivative contracts and forward exchange contracts (Bhpbilliton.comm, 2016).

Conclusion

The study discusses about the method of fair value treatment in accounting for the purpose of true and fair value judgment of the financial statements of a particular organization in a more accurate manner. This method was evolved after it was observed that historical cost accounting technique was not sufficient to adhere to the needs of financial reporting. Although there are several pros of the implementation of fair value accounting method in the recent times the consideration of this method has created several controversies. The main complication in the mining industry has advised due to the absence of relevant guidelines for the evaluation methods. Moreover, the accounting concept is only effective in items, which are unique in nature such as patents and equipments and also the different types of items such as electronic and technology-related items which gets replaced over time by a more advanced product. The fair value method of accounting is only useful in suggesting a technique for accounting of the products but does not demonstrate on how the product is to be classified and which process is to be implemented for evaluation of the items. It has been observed that over the time Australian accounting standards Board with assistance from IASB has been able to resolve several issues. The introduction of new standard as per AASB 13 the accountants are able to measure the financial items with more uniformity and accuracy.

Reference list

AASB, C.A.S., 2013. Fair Value Measurement

Beisland, L. A., & Frestad, D. (2013). How fair-value accounting can influence firm hedging. Review of Derivatives Research, 16(2), 193-217.

Bhpbilliton.com. (2016). [online] Available at: https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015_interactive.pdf?la=en [Accessed 13 Sep. 2016].

Bhpbilliton.com. (2016). [online] Available at: https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.pdf?la=en [Accessed 13 Sep. 2016].

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.

Greenberg, M.D., Helland, E., Clancy, N. and Dertouzos, J.N., 2013. Fair Value Accounting, Historical Cost Accounting, and Systemic Risk. Rand Corporation

Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939 Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939

Lee, C., & Park, M. S. (2013). Subjectivity in fair-value estimates, audit quality, and informativeness of other comprehensive income. Advances in Accounting, 29(2), 218-231.

Palea, V. (2014). Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2), 102-116.

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