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Part A: Writing an Essay 

Statement:

Laux and Leuz (2009) argue that “the fair value debate is far from over and much remains to be done” (p.833). As well, Whittington (2008) argues that “in a realistic market setting, the search for a universal measurement method may be fruitless and more appropriate approach to the measurement problem might be how to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts”. (p.139)

Required:

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.

Part B: Case Study 


The topic that relates to the case study assignment is on Corporate Fair Value Reporting. You will be required to investigate 2 ASX listed companies corporate reporting on Fair Value.

Instruction for the case study:


You are required to down load the financial reports of any two selected companies and identify the required information from the notes on fair value disclosures. You need to compare and contrast as to how two companies’ fair value disclosures are made. In your presentation, you need to identify and report on comparative fair value hierarchies, tiers, and methods used for differing classes of assets by the selected two companies.

Fair Value Accounting and Corporate Reporting

Fair Market Value (FMV) is an estimate of a property according to its current market value. The estimate can be found either with an extrapolation or the precedence. The market transactions of a property or a stock are not observable for certain assets, and this is where the Fair Market Value is calculated. They are subjective to circumstances, comparable precedence and the assessment criteria set by the people involved. When the shares of a specific firm are traded in the stock exchange, the stocks are bought and sold based on market prices, the exchange actually provides one of the reliable ways to assess stock’s Fair Value..

In US, The Financial Accounting Standards Board (FASB) has issued guidelines about how to determine Fair Value Estimates for financial reporting. The framework gives three levels of hierarchy to assess the level of judgement for Fair Value Estimation. Fair Value Accounting has been part of GAAP (Generally Accepted Accounting Principles) in US since 1990s.  

The Relevance of Fair Value Accounting in the Contemporary World

In this modern era, where the world runs solely on corruption, fraud and black money, it is hard to find a seller who quotes a Fair Value of their asset. The economy of the country is at stake if a practice of Fair Accounting does not take place (CHEN, TAN and WANG, 2012). Many companies have gone bankrupt and crashed heavily because of their unfair trading methods. For example, in Dubai, the concept of an ‘I owe you’ bond in which, one takes a loan based post-dated checks (the loan is given based on the word of the other person), when this cycle continues and if for some reason, be it intentionally or unintentionally, the check bounces, everyone in the system, who has given the loan, fall in debt. It goes to an extent where the person who took the loan, will watch his business fall apart and not try to strengthen it anymore in fear of not being able to pay the debts (de Jager, 2014).

Is Fair Value Accounting acceptable for a broad range of public and private organisations in corporate reporting?

A Fair Value Accounting should definitely be acceptable in a broad range of organisations in the public and private sector in corporate reporting for a healthy, substantial economic growth of the country, unfortunately, this is not the case always. In the Southern parts of India, businessmen typically show accounts for profit in a substantially less margin than what they have gained (Jílek, 2016). They use other means to completely hide their profit margins and as a result of which, they on their books, show a very less profit margin to the Income Tax Department. This is one of the examples to support this claim.

The Role of Fair Value Accounting in Economic Growth

Does fair value accounting have any influence on the subprime and/or other crises in the contemporary world?

Subprime mortgages, in the US, proved to be a very unsustainable economic model. The banks started giving away housing loans based on their credit rate to only pay the interest and not the principal amount. Naturally, people started affording to take loans more than what they could pay off. Initially, the economy flourished with so many people able to afford houses. But gradually as they started to pay off the loans, they realised they could not afford it and they let the banks seize their houses instead (Marra, 2016). Now, the banks had too many houses to sell which forced them reduce it to a substantially lower price which in turn caused subprime crisis. So, it is very important to understand the implementation of a substantial economic model to prevent further economical crunches and fair value accounting is one way to ensure that.

Fair value is the price on which the seller and buyer have agreed to the sale of the product. It is determined at the market price of the product sold (Ewelt-Knauer, 2013). Fair value is the representation of the price at which the assets of the company are sold and the price at which the liabilities of the company are settled under the market conditions (Menicucci and Paolucci, 2016).

This article studies the fair value accounting of the financial statements of two firms listed on the Australian Securities Exchange. The chosen firms are Amcor Limited and the Australian and New Zealand Banking Group Limited.

Selected companies on the Australian Securities Exchange

Amcor Limited is one of the most popular companies of Australian Securities Exchange. It is a packaging company which aims to develop and produce quality food products and responsible for the strong packaging of food and other products in the pharmaceutical, beverage, home, personal care products. The financial statement studied is of the financial year 2017-18.

The Australian and New Zealand Banking Limited is a financial banking company. It is the third largest company in the Australian Banking Sector. The primary functions of the bank constitute personal banking and business financial solutions. The financial statement studied in the article is of the financial year 2016-17.

Approaches to the evaluation of the Fair Value Accounting of the two companies listed - The Australian and New Zealand Group Banking Limited

In the notes concerning the financial statements on the fair value determination, The Australian and New Zealand Group Banking Limited mention that the company has established a control framework and segregated the duties appropriately for the correct estimation of the fair value. The company lays emphasis on the need for the correct determination of the fair value. The framework mentioned in the company is as follows:

  1. The transaction of the products to a third party is only carried out after a careful assessment and determination of the fair value of the product.
  2. The market price of the products mentioned for the representation of its value is verified by an independent party (Rashad Abdel-Khalik, 2010).
  3. The methodologies and the procedures adopted to determine the fair value of the products of the company are by a different third party.
  4. The movements in the fair value are observed by an independent authority and they are explained by reference to underlying factors which might have influenced the fair values.
  5. And the value adjustments are also independently monitored and thus stated.

Fair Value Accounting and the Prevention of Economic Crises

The company also mentions the approaches and the evaluation techniques for the determination of the fair value in the financial statement. These are as follows:

Financial asset and liability

Fair value Approach

Trade Securities

Security (Short-sold)

Assets and Liabilities

Modelled valuation technique is used where there is no quoted market price.

Loans, borrowings and other debt

Easy cash flow techniques are used.

Non-financial instrument (assets for sale)

The value is determined by the analysis of the price in the foreign currency and the foreign exchange market.

Amcor Limited

The following mentions the fair value approach and the methodology as provided in the notes to the financial statement for the fair value evaluation for the financial year 2018.

Financial asset and liability

Fair value approach

Cash and cash equivalent

Financial assets and liabilities (Short-term)

Receivables of Trade and other

Payables of Trade

The estimated values are an approximation because the mentioned assets and liabilities are of the short-term period.

Other financial assets and liabilities

The estimation is based on the market prices.

Derivative financial instruments

The evaluation is based on the current market prices, the opinion of an independent party and the standard valuation techniques.

Analysis of the approaches and the methodologies of the fair values of the two companies

It is observed that the two companies differ significantly in their approach towards the determination of the fair value of the products. The Australian and New Zealand Banking Group Limited has adopted a very detailed and a pragmatic approach towards the estimation of the fair value of the products. The company has devised a control framework for the purpose. The company has applied different methodologies for the fair value evaluation. Apart from that, the company has sought the opinion and legitimacy of the independent third parties at almost every step (Razak and Stainbank, 2017). This ensures that the process is transparent and justifiable. The company has segregated the duties of the determination of the fair value an thus ensures that the information provided in the financial statement is reliable.

The Amcor Limited, on the other hand, has relied on the estimation of the values on the prevalent market values of the products in the most cases. The company uses the opinion of the third party in a few cases such as that of derivative financial instruments. The company also uses the data from the previous estimation. The company also uses the modelled valuation technique in the process.

From a careful analysis, it can be inferred that the Australian and New Zealand Group Banking Limited has allotted much more resources to ensure the accuracy of the fair value accounting. The methodologies and the approaches for the determination are concrete and reliable. The Amcor Limited uses less scientific methods and relies on the market price mechanism for the fair value accounting of the products (Rodríguez Bolívar and Navarro Galera, 2012). It is advisable for the company Amcor Limited to divert more resources than the present for the accurate determination of the fair value accounting.

Comparison of approaches and the methodologies of the fair values of the two companies

The commonly used approaches for the determination of the fair value accounting include the following:

  1. Market
  2. Cost
  3. Income

Both the companies have extensively used the market and the income approach for the fair value accounting of different financial components.

Case Study Analysis: Amcor Limited and the Australian and New Zealand Banking Group Limited

The market approach uses the price of the product determined by the forces of the market to carry out the transactions. The product is determined by the comparison with the identical assets and liabilities. The data used to estimate the value is real data. The derivation of the fair value of the product requires acute judgement on the part of the management (Ryska and Valder, 2012). This is so because the data is available for only a few factors. Also, the price determination is also a complex process because of the presence of several influential market forces  (Alexander, Bonaci and Mustata, 2012). Therefore, the discretion of the management may be required to understand the influence of the factors whose data is not available on the value of the product.

The Australian and New Zealand Banking Group Limited applies the use of this method in the determination of values of financial quotients. The company uses the modelled techniques where the data is not available. For the determination of Non-financial instrument component of assets, the company uses data provided by the foreign exchanges and the foreign markets (Shaffer, 2010). The Amcor Limited uses the approach to assess of the value of financial assets and liabilities and derivative financial instruments wherever the data is available.

The income approach to determine the fair product value converts the future sum of the assets and liabilities to a single present amount. This can only be estimated for a few years from the current period. The approach requires intelligence and perspicacity to correctly estimate the value of the product. The approach depends upon – cash flow, the period of cash flow and the risks associated with the cash flow.

The approach has been used by Australia and New Zealand Banking Group Limited for the determination of the fair value of loans, borrowings and other debt issuances. The Amcor Limited uses the income approach in assessing the fair value of unquoted equity investments.

The cost approach is the approach where the value is determined by the estimation of cost which would be used in the substitution of the assets and the liabilities and the cost incurred by the obsolescence of the assets (XIE, 2016).

The selfish motives of the administration to change the perspective of the company is primarily the reason for the presentation of the improper and inaccurate value of the products. For this reason, independent and third-party analysis is required for the determination of the values (Yuan and Liu, 2011). Both the companies have implied the use of this method to ensure the accurateness of the value of the products mentioned in the financial statements.  

References

Alexander, D., Bonaci, C. and Mustata, R. (2012). Fair Value Measurement in Financial Reporting. Procedia Economics and Finance, 3, pp.84-90.

CHEN, W., TAN, H. and WANG, E. (2012). Fair Value Accounting and Managers' Hedging Decisions. Journal of Accounting Research, 51(1), pp.67-103.

de Jager, P. (2014). Liberal Fair Value Accounting in Banks: A South African Case Study. Australian Accounting Review, 24(2), pp.134-153.

Ewelt-Knauer, C. (2013). Earnings Management in the Context of Fair Value Accounting: Adjusting the Modified Jones Model to Fair Value Accounting. SSRN Electronic Journal.

Jílek, J. (2016). ‘Fair Value’ of Core Deposits in the EU version of IFRS: A Critical Review. Australian Accounting Review, 26(3), pp.312-325.

Marra, A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized Economy. Journal of Accounting, Auditing & Finance, 31(4), pp.582-591.

Menicucci, E. and Paolucci, G. (2016). Fair value accounting and the financial crisis: a literature-based analysis. Journal of Financial Reporting and Accounting, 14(1), pp.49-71.

Rashad Abdel-Khalik, A. (2010). Fair Value Accounting and Stewardship*. Accounting Perspectives, 9(4), pp.253-269.

Razak, M. and Stainbank, L. (2017). Fair value accounting by listed South African companies in the non-financial sector. South African Journal of Accounting Research, 32(1), pp.1-24.

Rodríguez Bolívar, M. and Navarro Galera, A. (2012). The Role of Fair Value Accounting in Promoting Government Accountability. Abacus, 48(3), pp.348-386.

Ryska, J. and Valder, A. (2012). Fair value in financial accounting. Agricultural Economics (Zem?d?lská ekonomika), 49(No. 11), pp.526-532.

Shaffer, S. (2010). Fair Value Accounting: Villain or Innocent Victim - Exploring the Links Between Fair Value Accounting, Bank Regulatory Capital and the Recent Financial Crisis. SSRN Electronic Journal.

XIE, B. (2016). Does Fair Value Accounting Exacerbate the Procyclicality of Bank Lending?. Journal of Accounting Research, 54(1), pp.235-274.

Yuan, M. and Liu, H. (2011). The Economic Consequences of Fair Value Accounting. Accounting, Economics, and Law, 1(2).

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