Essay: Fair Value Accounting's Relevance In Today's World.

Based on the above arguments, write an essay on the relevance of fair value accounting in the contemporary world. In your demonstration you should highlight of whether fair value accounting is applicable for a wide range of private and public sector organisations in corporate reporting. Also, explain whether fair value accounting has had any influence on the subprime and/or other crises in the contemporary world. The expectation is that a reasonable amount of research articles (academic and professional) are used in the body of the essay.

Fair value is the tool that uses the market prices for the valuation of the assets and liabilities of the company for the preparation of the financial statements. It is the estimated price at which an asset is sold or a liability is paid off with any third party under the prevalent market conditions. The main idea behind fair value accounting is to consider the prices that the companies are ready to pay under active market. Active market means the one in which there is a lot of transactions that are very high and that includes lot of sufficient information about the prancing. Also, it is important that from the market the fair value is taken from should be the principle market for the assets and liabilities of the company (Andiola, et al., 2018). Greater volume of transactions leads to better pricing and companies should always look out for that. Now many companies are trying to adopt this practice of fair value marketing for the preparation of the financial statements under contemporary world of accounting. This means that the assets and liabilities would be reflected in the financial statement at their fair values. It is also important to consider that fair values should be taken as a basis on which the performances of the company are being evaluated. In this assignment we will discuss what are the overall implication of taking fair value accounting in the contemporary world and how the companies around the world are affected by this (Appelbaum, et al., 2018).

In the given assignment, Laux and Lez have stated that fair value accounting and the debate that is related to that will not die soon. There are many factors that the companies need to consider when they are selecting any specific method for the measurement of their items, to make sure that the measurement is to the best of the ability of the company and incurs the best result under any given situations (Axelsen, et al., 2017).

Fair value reporting has been considered in many companies as a basis for the measurement of the value of the financial assets of the company, and the financial instruments that they deal in the market, but for traditional items of the balance sheet this method is still not consider that applicable as the management feels that it might under value or over value the asset in some cases. So, we see that there is a negative approach on part of the management, also one more reason why companies don’t consider this is a good option is because they are not having active market for all the items so at any given point it becomes difficult to ascertain what the fair value would be. Also, there are lot of fluctuation happening and that gives an unstable approach to the financial statements if they are prepared based on the fair value accounting (Bailey, et al., 2017). The aim should be that companies should present the correct value of their assets and liabilities and that is possible only when there is stability in the overall approach of the management and that is not possible in this context.

Conclusion

Also, we see that companies both private and public are very sceptical when it comes to applying these principles given the overall level of complexity involved in the valuation of the same. Thus, they do not prefer that they use it for their overall general reporting framework, though the authorities are trying to incorporate the same in their corporate reporting framework. There are many challenges that the companies must face in general thus they do not prefer to apply such kind of measurement method that would require added cost and efforts as they must take help from valuation experts for the determination of the fair market value (Bumgarner & Vasarhelyi, 2018). Also, there are various approach for its measurement like the market value approach, income approach and cost approach. So different companies can opt for different methods and measuring very item of the balance sheet on different approaches is not feasible as it will render a redundancy to the information that the management is providing in their annual reports. It will be difficult for the stakeholders also to ascertain which measure has been adopted and whether it is feasible or not (Garon, 2018). Thus, it means that on various grounds the management will struggle in case they adopt this basis of measurement for the company. They should also see that the authorities are trying that they can incorporate this principle of corporate reporting in the long run, but in that way, we can see that there are areas in which it won’t be feasible like measurement of the inventory, or the property plant and equipment, because they need to consider the concept of depreciation also. So, we see that it is a very complex method altogether (Fukukawa & Mock, 2011).

Also the concept of fair value accounting is having relevant effect on the subprime and other crises of the world because people are considering which methods to employ for the measurement of the assets, as at any given day the market price would be the amount that which the companies would sale of their products and that should be its value technically but when it comes to preparation of the financial statement this is a wrong method and can make the process very complex, thus the need of the hour is that the issues that are related to contemporary accounting should be taken care of in such a way that correct value is presented in that (Heminway, 2017). Fair value measurement is adopted as a technique for the measurement of assets of the company like financial instruments because they are traded in market and there is active market present for them, which is not available for many other items of the balance sheet. Hence it makes the entire process complex.

Conclusion

Based on the overall analysis it can be said that companies should try to see whether they can employ these measurement policy of fair value reporting and with time there would be many changes that would make it feasible enough to apply these principles but the authorities need to do a  lot of research for that because accounting as a concept should remain static if not anything else and investors should get the correct information of what they are indulging and investing in and in what ways would this be feasible for them in the long run.

Telstra Corporation and TPG Telecom

In the given case two companies have been selected that are listed on the Australian Stock Exchange. The two companies are Telstra Corporation and TPG Telecom. Both are companies belongs to the telecommunication sector and are one of the leading companies in Industry (Mock, et al., 2018).

Telstra Corporation deals in consumer electronic goods like mobile phones, software etc. It also helps in providing services to the business for installation and management of their telecommunication lines. It works under two levels, business to consumer and business to business. The overall operations of the company are limited to Australia and the company is also considering moving to other countries also.

TPG Telecom is an Australian Company that provides consumer mobile services and business internet services. It is more of consumer oriented company and there is not much business to business transactions. Most of the services that they provide are very reliable and easy to use for the consumer.

In the given part, the fair value accounting measures that these specific companies adopted is cited and presented and explained below.

In the given below extract it can be seen how the company is valuing the identifiable intangible assets at the fair market value at which they have acquired it. It is stated that the discretion of the management of the company in ascertaining that appropriate judgement is involved in the valuation of the intangible assets at their fair value. It involves estimating time and amount of future cash flows that have been derived and the rate at which the rate at which these cash flows are discounted are also taken into consideration for the management (Lessambo, 2018). These estimations are based on several factors that includes current forecasts done, considering the overall growth rates for the costs, the overall operating costs and the useful life of the asset overall (Sirois, et al., 2018). Thus, we see that there is a lot of judgement elements that is involved on part of the management and thus they need to be sure before taking any steps and often requires help of valuation specialists. But this can be applied only in case of intangible assets, in case of property plant and equipment the same is not considered (Segal, 2017). The auditor has stated the same in their audit report under key audit matters and considered it as a matter of importance and where there can be certain risk elements involved that can affect the position of the company and of the investors.

In case of TPG telecom the assets and liabilities are measured at historical cost expect those that have been acquired under normal course of business combination means in cases where there have been any merger or acquisition. In that case the assets and liabilities have been measured at fair value of accounting and their position has been considered as an important element for the corporate reporting segment of the company.

The company has given off right shares to the shareholder and have valued the same at fair value. For assets that have been acquired under business combination the company has followed Inventories are measured at normal sales prices that prevail under normal business conditions, and in case of intangible assets they have taken into consideration the discounted cash flow method. For valuation of property plant and equipment they have quoted market price for similar items. 

Thus, based on all this it can be said that method of valuation is Many but it depends on entities which they choose. Between the two companies TPG has made better disclosure of the methods adopted and have stated it clearly the methods are also very diverse. Which in case of Telstra is very limited and there is only very asset that are valued as per fair value approach.  

References

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Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics.. Journal of Accounting Literature, 40(1), pp. 83-101.

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Garon, J., 2018. Ownership of University Intellectual Property. Cardozo Arts & Ent. LJ, 36(1), p. 635.

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