Appropriate Application of Ias

Topics: Balance sheet, Generally Accepted Accounting Principles, Financial Accounting Standards Board Pages: 39 (14325 words) Published: August 14, 2013
FAIR VALUE ACCOUNTING AND THE MANAGEMENT OF THE FIRM
* Benzion Barlev, ,
* Joshua Rene Haddad
* Department of Accounting, School of Business Administration, Hebrew University of Jerusalem, Jerusalem, Israel Received 15 October 2001
Accepted 20 April 2002
Available online 26 September 2002
* http://dx.doi.org/10.1016/S1045-2354(02)00139-9, How to Cite or Link Using DOI * Permissions & Reprints

Abstract
The development of accounting standards reveals that the historical cost accounting (HCA) is being replaced by the fair value accounting (FVA) paradigm. FVA, in contrast to HCA that hides the real financial position and income, is more value relevance. The relevance of financial reports should be measured, in addition to association between market and accounting returns, in terms of its contribution to the stewardship function, reduction of agency costs, enhancement of management efficiency, and providing relevant information to stakeholders and workers in their social conflict. FVA-based reports call the attention of shareholders to the value of their equity and enhance the function of stewardship. Managers will be asked to guard the value of shareholders’ equity and to account for their efforts. This will causes a basic change in managers’ perceptions of their duties. The FVA provides also a complete full disclosure and it is compatible with transparency.

Introduction
An analysis of the development of accounting standards reveals an interesting phenomenon. Along with new financial reporting innovations in sporadic areas, there is a steady process of change of a basic accounting paradigm. The old historical cost accounting (HCA) is being replaced by the new fair value accounting (FVA) paradigm. These changes reflect the needs of users of financial accounting and the efforts of accounting standards setting bodies to reverse the pattern of declining relevance of financial information ( Francis & Schipper, 1999 and Lev & Zarowin, 1999). Whatever the reasons, the incorporation of FVA into the inventory of generally accepted accounting principles (GAAP) has deep meaning to the field of accounting and to management philosophy. This process has intensified with the expansion of global economy and the rapid growth of information technology (IT), two major factors that have created an impressive infrastructure for the evolution of an international efficient market mechanism. HCA-based financial statements obscure real financial position and the results of operations of a firm and provide ample room for manipulation. Often the historical book value of assets and liabilities has only a remote association with market values. This situation permits management to manipulate reported earnings and to hide their lack of real accomplishment. FVA, in contrast to HCA, measures and discloses the current value of assets and liabilities and is more value relevance. Empirical evidence indicates that fair value rather than historical cost numbers are more highly associated with stock returns. The academic literature provides consistent evidence suggesting that fair values of certain financial instruments should be included in the balance sheet and that changes in the fair values of these instruments should be included in the income statement (AAA’s Financial Accounting Standards Committee, 1998). Nonetheless, the value of financial reports does not depend on the statistical association between accounting and market returns (Francis & Schipper, 1999). The value should be measured in terms of its contribution to the stewardship function, reduction of agency costs, and enhancement of management efficiency. It ought to be assessed, also, in its providing relevant information to stakeholders and workers in their social conflict1. Reporting the fair value of assets and liabilities in the balance sheet calls the attention of shareholders to the value of their equity and to periodic changes in this value, as is...

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