Financial Accounting

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Arab British Academy for Higher Education

UNIVERSITY OF ESSEX

THE ESSEX BUSINESS SCHOOL

10/09/10-04:05:28

The Effect of Applying Fair Value on the Financial Statements of UK Leading Companies

By

Bassam Kazmouz
0948799
Supervisor

Dr Robert Wearing

September 2010

Dissertation submitted in partial fulfilment of the requirements for the award of ACCOUNTING AND FINANCE (MSC)

www.abahe.co.uk

Arab British Academy for Higher Education

TABLE OF CONTENTS

I. Introduction ........................................................................................................... 5 1.1 Overview .................................................................................................... 5 Study Motivation......................................................................................... 8

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1.2

II. Fair Value........................................................................................................... 11 2.1 2.2 2.3 Fair Value Concept ................................................................................... 11 Historical Cost Concept............................................................................. 12 Accounting Valuation Methods and Their Problems.................................. 13 Historical Cost ................................................................................... 15 Replacement Cost .............................................................................. 16 Fair Value (Exit Price) ....................................................................... 17 Present Value ..................................................................................... 18 Deprival Value................................................................................... 19

2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.4 2.5 2.6 2.7 2.8 2.9

Fair Value Implementation........................................................................ 19 The Reliability and Relevance of Fair Value and Historical Cost............... 21 Fair Value and Auditors ............................................................................ 26 Fair Value to Whom? ................................................................................ 27 Advantages and Disadvantages of Level 2 and Level 3 of Fair Value ........ 28 Fair Value and Stewardship....................................................................... 29

2
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Arab British Academy for Higher Education

III. Literature Review .............................................................................................. 31 3.1 3.2 3.3 3.4 Fair Value, Stewardship and Agency Costs ............................................... 31 Earning Management ................................................................................ 33 Fair Value and Industries........................................................................... 38 Fair value for specific items in financial statements................................... 40 Fair Value and Financial Crisis.................................................................. 42

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3.5

IV. Sample and Methodology .................................................................................. 45 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Data Collection ......................................................................................... 45 The First Adoption of IFRSs ..................................................................... 46 The Impact of First Adoption of Fair Value on Studied Companies in 200547 Hypotheses................................................................................................ 50 Data Pre-processing .................................................................................. 54 Data Inconsistency .................................................................................... 55 Getting Expected Values...
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