In today’s business world, wide use of Fair Value Accounting can be seen by the companies in order to provide the investors and other users of the financial reports with the correct value of the assets and liabilities. Under the fair value measurement process, the obligation on the business entities is to capture the changes in the values in the assets and liabilities over time. The following discussion involves in analyzing the use of fair value measurement by Blackmores Limited (Blackmores) and Dabur India (Dabur).
Fair Value Measurement by Blackmores
It can be seen from the 2017 Annual Report of Blackmores Limited that the company has prepared and presented their financial statements by complying with the standards of Corporations Act 2001, Australian Accounting Standards, Australian Accounting Standard Board (AASB) and International Financial Reporting Standards (blackmores.com.au, 2018). It needs to be mentioned that the significant use of fair value measurement can be seen in the financial reporting of Blackmores. According to the consideration of the directors of Blackmores, they have considered the carrying amounts of their financial assets and financial liabilities on the fair value measurement basis in the Consolidated Financial Statements. It can also be observed that Blackmores has used some specific processes for valuation and assumptions in order to use fair value measurement and they are discussed below.
As per the techniques and assumptions in Blackmores, the determination of the fair values of the financial assets and liabilities in the active liquid market has been done with reference to the quoted market prices (blackmores.com.au, 2018). The use of quoted prices can also be seen for determining value of derivative instruments; but in the absence of this quoted price, Blackmores has performed a discounted cash flow analysis with the use of applicable yield curve for non-optional derivatives and models of option pricing for optional derivatives. Lastly, Blackmores has determined the fair value of the other financial assets and other financial liabilities as per the generally accepted pricing models based on the analysis of discounted cash flow with the use of prices from visible current market transactions (Schwarzbichler, Steiner & Turnheim, 2018).
Apart from the above, the analysis of the 2017 Annual Report of Blackmores shows that the company has used the fair value measurement for presenting their financial statements in the Consolidated Financial Statements so that the users can get the relevant value of them (Ettredge, Xu & Yi, 2014). In the process of fair value measurement, Blackmores has added or deducted the transaction costs directly attributed to the financial assets and financial liabilities from their fair value; and these costs are recognized straight away in the profit or loss. Moreover, Blackmores has used the fair value measurement for the classification of their financial assets at ‘fair value through profit or loss’ (RVTPL), ‘available-for-sale’ (AFS) (blackmores.com.au, 2018).
It needs to be mentioned that Blackmores uses the fair value measurement for the assessment of the performance of their financial assets with the help of documented risk, investment or management strategy and information of them. For the initial recognition of derivative financial instruments, Blackmores uses the fair value measurement on the date of derivative contracts and then their measurement is done at fair value on the reporting date. At the same time, Blackmores is also involved in fair value head in order to minimize the risks of change in interest rate, change in discounted rate and others (Hodder, Hopkins & Schipper, 2014).
For the impairment of the non-current assets, Blackmores uses the fair value measurement after deducting the cost to sell and value in use. Most importantly, Blackmores uses the fair value for measuring their business revenue. In Blackmores, the non-monetary items under the transactions related to foreign currency are measured at fair value. In addition, Blackmores uses the fair value measurement for the measurement of equity-settled share-based payments and other providing similar services (Barker & Schulte, 2017). In order to recognize the intangible assets on the acquisition date, Blackmores uses the fair value measurement.
Fair Value Measurement by Dabur India
According to 2016-17 Annual Report of Dabur, the company has prepared and presented their financial statements as per the standards of IND AS and Disclosures by making additional compliance with Schedule III (revised) under section 133 of the Corporations Act, 2013 (dabur.com, 2018). It can be observed from the 2016-17 Annual Report of Dabur that the company has used fair value measurement for measuring some financial instruments, assets and liabilities. It can be observed that Dabur has adopted a specific philosophy for using the fair value measurement basis.
As per the assumption, the measurement of fair value is based on the presumption that the transaction of selling assets or transferring liabilities occur in the market place either in the principal marker or in the absence of the principal market. As per 2016-17 Annual Report, Dabur carries out the measurement of their assets and liabilities with the use of the assumption that the market participants act in their economies best interest. It can be observed from 2016-17 Annual report of Dabur that the company has used the fair value measurement in order to recognize some of their assets as well as liabilities and they are shown below:
The 2016-17 Annual Report of Dabur states that the company measures the sales from their business activates in fair value measurement basis. At the same time, the use of fair value measurement can be seen by Dabur at the time of the recognition of the investment properties (dabur.com, 2018). In this aspect, Dabur determines their values on the basis of evaluation performed by accredited external independent values. According to 2016-17 Annual Report of Dabur, the company uses the fair value measurement for the measurement as well as recognition of their intangible assets of the business. More specifically, Dabur uses the fair value measurement for the recognition and measurement of their business goodwill (Clor?Proell, Proell & Warfield, 2014).
It can be observed in the annual report of Dabur that the company has adopted the strategy of using the fair value measurement for the recognition of all financial assets (dabur.com, 2018). At the same time, all the financial liabilities of Dabur are recognized on the fair value measurement basis. In this context, it needs to be mentioned that Dabur classifies their business liabilities as measured after recognizing them in amortized cost or fair value through profit and loss. In case of share based payments, the use of fair value measurement can be seen by Dabur for recognizing them. Dabur determines the fair value for their shares under the ‘Black Schole’s Method’ (Shalev, Zhang & Zhang, 2013).
It can be seen from the annual report of Dabur that the company has used fair value measurement for recognizing and measuring different financial aspects of business combination. It needs to be mentioned that Dabur consider the fair value of the assets and liabilities generating from any contingent consideration assignments (Blankespoor et al., 2013). Thus, it can be observed from the above discussion that there are many financial areas where the use of fair value measurement can be see from the side of the company. In this context, it needs to be mentioned that the fair values of the assets and liabilities are included at the exchange amount of those assets and liabilities.
Similarities and Differences
The above discussion shows the significant use of fair value measurement in different aspects of the financial reporting of both Blackmores and Dabur. It needs to be mentioned that there are major similarities in the fair value accounting of these companies and some minor dissimilarities. The major similarity is that both Blackmores and Dabur has used fair value measurement for measuring and recognizing their financial assets and financial liabilities. At the same time, both the companies have measured their financial assets and financial liabilities on fair value basis at the time of their reporting in the Consolidated Financial Statements (Du, Li, & Xu, 2014). The main aim of these two companies behind the use of fair value measurement is to express the relevant and true value of their financial assets and liabilities.
Apart from these, they both have used fair value for measuring as well as recognizing financial derivative instruments, share based payments, intangible assets and others. However, minor difference can be seen for Blackmores and Dabur in the use of techniques and assumptions for using fair value. For example, Dabur considers the assets and liabilities that have occurred both in marketplace or outside marketplace for fair value measurement, whereas, Blackmores has considered the assets and liabilities for fair value measurement taken place within the marketplace. However, these are minor dissimilarities (Shalev, Zhang & Zhang, 2013). On the overall basis, it can be concluded that both the companies have used fair value measurement in their financial reporting.
Fair Value Measurement has become a popular approach for the business organizations where the companies are needed to catch the change in the value of their assets and liabilities. Still, there is presence of some arguments on the fact that whether the companies should embrace or welcome fair value measurement method in the coming years. This report aims at analyzing whether the companies should embrace fair value measurement in coming year in the lights of institutional theory.
Discussion
Institutional Theory
Institutional Theory is regarded as an approach to understand the organizations and the practices of management as a social product not as economic pressures. Huge popularity of this theory can be seen in the recent years due to its ability for explaining organizational behaviors against the economic rationality (Keohane & Martin, 2014). For example, the use of institutional theory can be seen for explaining some major managerial innovation adopted by the companies in spite of their inability to improve organizational efficiency. According to institutional theory, the adoption as well as retention of various organizational practices often largely depends on social pressure for compliance with the laws rather than the technical pressure for economic performance (MacCormick & Weinberger, 2013).
The presence of six fundamental concepts can be seen under institutional theory; they are the infusion of value, diffusion, rational myths, loose coupling, legitimacy, and isomorphism. According to the infusion of value, infusion in the organizations can be seen with major significances more than the bare function utility. At the same time, the infusion of meanings and values can lead unintended consequences (Vayanos & Woolley, 2013).
According to the concept of diffusion, business organizations often adopt new business practices not due to their technical outcome, but they have a positive connection with the social as well as community values. As per the rational myth in institutional theory, business organizations do not adopt rules, regulations and management practices in the presence of economic rationality; they adopt them in the presence of the myth about what constitutes economic rationality.
It implies that the organizations operate in the presence of a taken-for granted assumption about what a successful organization should be (Fuenfschilling & Truffer, 2014). This part of the institutional theory states that the organizations are often needed to separate as well as buffer their core production functions due to institutional pressure. According to the legitimacy concept, business organizations that appear to be legitimate are more likely to get and access the resources than the non-legitimate organizations. According to isomorphism, conformity to the environment of institutions can be considered as the process to adopt the structure, practice and behavior of the leading organizations (Munir, 2015).
Linkage between Institutional Theory and Fair Value Measurement
The above discussion sheds light in different aspects of institutional theory. In this context, it needs to be mentioned that the future adoption of fair value measurement can be explained in the light of institutional theory. The central idea of institutional theory is that business organizations tend to operate in a social manner rather than any factor in the economy (Willmott, 2015). In this aspect, the six fundamental elements of institutional theory play a crucial part. It can be observed from the above discussion that the business organizations use to adopt a specific management approach as other leading companies have adopted them. Now, most of the large business organizations have adopted the strategy of fair value measurement. Thus, as per diffusion, there is a fair possibility that the other business organizations will embrace fair value measurement in future (Sjöstedt, 2015).
The legitimacy concept states that business organizations with legitimacy can access the resources more than the other. The adoption of the strategy of fair value measurement provides the companies with legitimacy. Thus, it can be said that the business organizations will adopt fair value measurement in order to access the economic resources more accurate manner (Voronov, 2014).
Most importantly, the core idea of institutional theory states that the business organizations behave in the social manner. It implies that there is possibility that all the business organizations under a same industry will adopt same managerial approaches or techniques for their business processes. In the presence of this assumption, it can be said that the business organizations in the same industry will adopt the fair value measurement approach in the near future (Vayanos & Woolley, 2013).
Conclusion
Based on the above discussion, it can be said that there is major possibility of adoption of fair value measurement by the companies in the coming year as per the concepts as well as assumptions of institutional theory. It is because companies have the tendency to act in a social manner rather than on the basis of economic rationality; and this tendency will make the companies in embracing the fair value measurement in the coming years as most of the large business corporations have already adopted the fair value measurement.
It also needs to be mentioned that the utilization of fair value measurement helps the companies in providing the true and relevant value of their financial assets and liabilities. Hence, in the presence of institutional theory’s concept and assumptions, it can be concluded that the companies will embrace the fair value accounting in the coming years.
References
Barker, R., & Schulte, S. (2017). Representing the market perspective: Fair value measurement for non-financial assets. Accounting, Organizations and Society, 56, 55-67.
Blackmores Limited. (2018). Annual & half-year reports . Retrieved 22 August 2018, from https://www.blackmores.com.au/about-us/investor-centre/annual-and-half-year-reports
Blankespoor, E., Linsmeier, T. J., Petroni, K. R., & Shakespeare, C. (2013). Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), 1143-1177.
Clor?Proell, S. M., Proell, C. A., & Warfield, T. D. (2014). The effects of presentation salience and measurement subjectivity on nonprofessional investors’ fair value judgments. Contemporary Accounting Research, 31(1), 45-66.
Dabur India. (2018). Annual Report 2016-17. Retrieved from https://www.dabur.com/img/upload-files/316-deluxe_ar17_web.pdf
Du, H., Li, S. F., & Xu, R. Z. (2014). Adjustment of valuation inputs and its effect on value relevance of fair value measurement. Research in Accounting Regulation, 26(1), 54-66.
Ettredge, M. L., Xu, Y., & Yi, H. S. (2014). Fair value measurements and audit fees: Evidence from the banking industry. Auditing: A Journal of Practice & Theory, 33(3), 33-58.
Fuenfschilling, L., & Truffer, B. (2014). The structuration of socio-technical regimes—Conceptual foundations from institutional theory. Research Policy, 43(4), 772-791.
Hodder, L., Hopkins, P., & Schipper, K. (2014). Fair value measurement in financial reporting. Foundations and Trends® in Accounting, 8(3-4), 143-270.
Keohane, R. O., & Martin, L. L. (2014). Institutional theory as a research program. The Realism Reader, 320.
MacCormick, N., & Weinberger, O. (2013). An institutional theory of law: new approaches to legal positivism (Vol. 3). Springer Science & Business Media.
Munir, K. A. (2015). A loss of power in institutional theory. Journal of Management Inquiry, 24(1), 90-92.
Schwarzbichler, M., Steiner, C., & Turnheim, D. (2018). Fair Value Measurement. In Financial Steering (pp. 431-440). Springer, Cham.
Shalev, R. O. N., Zhang, I. X., & Zhang, Y. (2013). CEO compensation and fair value accounting: Evidence from purchase price allocation. Journal of Accounting Research, 51(4), 819-854.
Sjöstedt, M. (2015). Resilience revisited: taking institutional theory seriously. Ecology and Society, 20(4).
Vayanos, D., & Woolley, P. (2013). An institutional theory of momentum and reversal. The Review of Financial Studies, 26(5), 1087-1145.
Voronov, M. (2014). Toward a toolkit for emotionalizing institutional theory. In Emotions and the organizational fabric(pp. 167-196). Emerald Group Publishing Limited.
Willmott, H. (2015). Why institutional theory cannot be critical. Journal of Management Inquiry, 24(1), 105-111.
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