Recently, fair value accounting suffers heated debate because the financial crisis. The purpose of this article is to evaluate and understand fair value both in literature analysis and practice. This paper emphasizes the advantages and disadvantages of the fair value measurement. Proponents believe that fair value can provide timely information that reflects current financial market conditions, and information supplied is reliable. On the other hand, critics argue that fair value accounting results the problem of volatility, limited verifiable and reliable information and procyclicality trend.
After evaluating the fair value method, two companies were selected which are Qantas and BPH Billion to reflect the real application of fair value and other alternative methods in their 2011 financial reports. The dominant measurement is still historical cost, but firms still widely use fair value in derivative financial instruments, employee share plan and so on. This article also comments the differences and similarities between two companies.
The last part shows the future development of fair value, and the opinion is not to abandon this measurement. Suggestions are also provided to solve particular problems, for example, firms can disclosure sufficient and relevant information and assumptions in Level 1, 2 and 3, and regulators should continue to issue fair value measurement standards and make modifications.
There are some heated debates about fair value merits and demerits and whether it has future development in financial report. Fair value is also called mark-to-market accounting and it is defined as the value of assets and liabilities could be exchanged between knowledgeable and willing parties in arms length transactions. The research methods of this article are based on some empirical evidences and analysis of literature. In the first part, it critically evaluates the fair value accounting by addressing the pros and coins, and draw a conclusion that fair value measurement is not a perfect method and will trigger many problems like inaccurate estimation, but issues still exists when using other methods like historical cost. Secondly, Qantas and BHP Billion that listed on ASX were selected to analyze how they used fair value and other methods in their 2011 financial reports. The conclusion is that their major measurement is still historical cost, but they still applied fair value in derivative financial instruments, employee share plan and cash et al. The differences are how they revalue property, plant and equipment, and how they recognize revenue. The last part illustrates the existing issues related to fair value and suggests some recommendations for future development. For example, the estimation of fair value contains errors and unreliable information when the market is inactive and leads too much management discretion. It is suggested that regulators have to consider how much latitude should give to managers, and also firms can provide sufficient information to investors no matter in Level 1, 2 or 3. Overall, the main idea for the last part is the fair value will not be abandoned in the future.
Definition of fair value
According to AASB 13, it defines the fair value as the estimation of price that would be received from the sell of asset or payment of transfer liability in an active market between willing parties at the measurement date (AASB, 2011). The fair value measurement encompasses three hierarchies, in level 1 if the quoted prices for the same assets or liabilities in active markets are available, fair value measurement should be used based on Level 1 inputs. If not, it should consider Level 2 or Level 3 inputs. Level 2 inputs are observable, including quoted prices for similar assets or liabilities in active markets, quoted prices for same or similar assets in inactive markets, and other relevant market data. In terms of Level 3, the inputs are unobservable for assets...
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