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Implications of Fair Value Accounting

Discuss a critical review of carmen giorgiana bonaci and jiri strouhal, 2011, fair value accounting and the regulation of corporate reporting?

Fair value accounting and is implication in the financial reporting regulation is a debated topic in recent days. In making financial and investment decision, fair value accounting has a significant contribution (Anagnostopoulos and Buckland, 2005). In this accounting practice market price of asset and liability is considered instead of historical cost for enhancing the relevance of the accounting information (Lu and Mande, 2014). According to Okamoto (2014), fair value accounting seems to be extremely rational and efficient concept in accounting and financial reporting (Okamoto, 2014). However, it has been reported that implementation of fair value accounting has encountered several issues which affected the decision making process of the investors (McEnally, 2007). According to Ohlson et al. (2010), in fair value accounting the subjective assumptions related to risk, transaction cost, and performance of the counterparty are found to be fundamentally inconsistent with the acceptable standards. Some studies have blamed fair value accounting for enhancing the negative impact of financial crisis (Sun, 2010). As various studies have expressed different views regarding fair value accounting, Bonaci and Strouhal (2011) had conducted a research study for exploring the implication of fair value accounting and the regulation of corporate reporting (Hodder, 2013). Bonaci and Strouhal (2011) have adopted qualitative research method for reaching firm conclusion regarding the chosen topic. The authors of “Fair Value Accounting and the Regulation of Corporate Reporting” has conducted a literature review for analyzing the findings of past research studies of relevant topic. The paper has considered wide range of literature for substantiating the principal arguments of this paper. Hence, it can be stated that the findings of the research paper can be validated through relevant academic papers and articles.

The authors of the paper has clearly identified the issues regarding the standard setting procedure in accounting by the governing bodies and focused on exploring the role of fair value accounting in reporting standards (McEnally, 2007). After the recent financial disruption has received, the debate regarding fair value has received greater attention and it is the background of the study conducted by Bonaci and Strouhal (2011). In this paper, the issue of Abacus has been considered which has produced information regarding fair value and its conceptual framework (Whittington, 2008). The author has clearly argued that the concept of fair value accounting is consistent with the requirements of the shareholders regarding stewardship (Bradbury, 2008; Hitz, 2007). On the basis of gathered data Bonaci and Strouhal (2011) have argued that fair value accounting has significant limitations and it has negative impact on the reporting standards which mislead the users of the financial information This can be supported by studies of various research scholars. However, the authors of this paper have focused on considering the most suitable way to deal with the situation for giving it an air trial (Bushman and Landsman, 2010). In order to establish this argument, Bonaci and Strouhal (2011) have presented the example of Abacus and it has shifted the debate of fair value towards higher recognition of the basic implication for the market as well as organizations. This study has extensively supported the positive implications of the fair value accounting practices. But, there are some other studies which have critically discussed the shortcomings of fair value approach (Fair value – from the Romanian reality perspective, 2011). However, in many cases the authors have failed to identify as well as discuss the major and specific limitations of the fair value. Some studies have left a scope for ambiguity regarding the major implications of the fair value accounting. According to Bradbuy (2008), the appropriateness of the accounting approach varies with situation. It has been argued that sometimes consideration of the replacement cost seems to be an appropriate method for reporting (Gwilliam and Jackson, 2008). On the other hand, deprival value and historical cost may seem relevant in some cases.

Limitations of Fair Value Accounting

The study conducted by Bonaci and Strouhal (2011) has not been able to draw clear conclusion regarding the role of fair value accounting in the global financial crisis (de Jager, 2014). There is a debate regarding the influence of fair value accounting in the global financial crisis. According to (Benston 2008), fair value accounting has estimated the assets and liabilities in the market price at the time of economic downturn (Magnan, 2009). Consequently, the value of the assets and liabilities declined. It forced the financial institutions to sell out the assets for maintaining the solvency ratio (Markarian, 2009). Hence, it has been argued that fair value accounting has exacerbated the financial crisis across the world. On the other hand, some researchers have argued that fair value accounting so not have direct influence in enhancing the negative impact of the financial crisis. According to Barth and Landsman (2010), the perceived pro-cyclicality of fair value accounting is not responsible for enhancing the severity of the financial crisis of 2007 - 2008. Moreover, the studies conducted by Laux and Leuz (2010) has supported this argument and stated that fair value accounting cannot be blamed for the global financial crisis. In this paper, Bonaci and Strouhal (2011) have included the perspective of the researcher who had emphasized on the negative role played by the fair value accounting approach during the global financial crisis. The findings of the study conducted by André et al., (2009) has been presented for justifying the influence  of fair value accounting in the global financial crisis. Again, the authors have considered the view of Veron (2008), who has argued that fair value accounting cannot be considered as the triggering factor for amplifying the impact of the global financial crisis (Patel, 2012). Bonaci and Strouhal (2011) has been able to present an unbiased point of view where both the perspective has been considered for evaluating the role of fair value accounting in financial crisis. However, the authors have not been able to make clear conclusion regarding the role of financial crisis.

This paper has also considered the political implication of the fair value accounting. This paper has indentified that it is important to consider the political implication so that it does not interfere in designing as well as implementing the appropriate conceptual framework and  accounting standard for preparing the financial report (Osisioma, Okoye and Ijeoma, 2014). It is truly stated in the paper that IAS 39 was questioned even prior to the financial crisis (Ronen, 2008). However, it must be noted that the authors have not explored the major implications of the accounting standards and fair value accounting. There is a future scope for discussing the financial instruments of IFRS 9 which classify and measure the financial assets after taking the decision to replace IAS 39 (Swamy and Vijayalakshmi, 2012).

Analyzing the paper, it can be concluded that the paper has presented a clear and unbiased perspective regarding the implication of fair value accounting. It is evident that the researchers have considered large range of literature and considered findings of those for constructing the qualitative study. The study has been based on the vigorous debate regarding the implication of fair value accounting in financial reporting system. The study has been able to provide significant insight to the major advantages as well as disadvantages of considering fair value accounting (Goh et al., 2015). This study have created further scope for research in evaluating the role of fair value accounting in global financial crisis and the aspects of financial instruments of IFRS 9 in order to classify as well as estimate the financial assets. But, the study has not been successful in making firm position regarding the role of fair value accounting during global financial crisis. In this paper, the authors could have adopted systematic research approach that would help in structuring the discussion in a better way. Quantitative method could be adopted for analyzing the major findings of the study and summarizing those for reaching firm conclusion at the end of the study. Reviewing different literatures the authors have just presented different perspectives and drawn a vague conclusion.

Role of Fair Value Accounting in Global Financial Crisis

References

Anagnostopoulos, Y. and Buckland, R. (2005). Historical cost versus fair value accounting in banking: Implications for supervision, provisioning, financial reporting and market discipline. Journal of Banking Regulation, 6(2), pp.109-127.

André, P., Cazavan-Jeny, A., Dick, W., Richard, C. and Walton, P. (2009). Fair Value Accounting and the Banking Crisis in 2008: Shooting the Messenger. Accounting in Europe, 6(1), pp.3-24.

Barth, M. and Landsman, W. (2010). How did Financial Reporting Contribute to the Financial Crisis?.European Accounting Review, 19(3), pp.399-423.

Benston, G. (2008). The shortcomings of fair-value accounting described in SFAS 157. Journal of Accounting and Public Policy, 27(2), pp.101-114.

Bonaci, C. and Strouhal, J. (2011). FAIR VALUE ACCOUNTING AND THE REGULATION OF CORPORATE REPORTING. ECONOMICS AND MANAGEMENT (16). Kaunas University of Technology.

Bradbury, M. (2008). Discussion of Whittington. Abacus, 44(2), pp.169-180.

Bushman, R. and Landsman, W. (2010). The pros and cons of regulating corporate reporting: A critical review of the arguments. Accounting and Business Research, 40(3), pp.259-273.

de Jager, P. (2014). Fair value accounting, fragile bank balance sheets and crisis: A model. Accounting, Organizations and Society, 39(2), pp.97-116.

Fair value – from the Romanian reality perspective. (2011). International Journal of Accounting & Information Management, 19(2).

Goh, B., Li, D., Ng, J. and Ow Yong, K. (2015). Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy.

Gwilliam, D. and Jackson, R. (2008). Fair value in financial reporting: Problems and pitfalls in practice. Accounting Forum, 32(3), pp.240-259.

Hitz, J. (2007). The Decision Usefulness of Fair Value Accounting – A Theoretical Perspective. European Accounting Review, 16(2), pp.323-362.

Hodder, L. (2013). Fair Value Measurement in Financial Reporting. FNT in Accounting, 8(3-4), pp.143-270.

Lu, H. and Mande, V. (2014). Does disaggregation of fair value information increase the value relevance of the fair value hierarchy?. Research in Accounting Regulation, 26(1), pp.90-97.

Magnan, M. (2009). Fair Value Accounting and the Financial Crisis: Messenger or Contributor?. Accounting Perspectives, 8(3), pp.189-213.

Markarian, G. (2009). The Routledge Companion to Fair Value and Financial Reporting.European Accounting Review, 18(3), pp.645-648.

McEnally, R. (2007). Fair Value Financial Reporting: An Investor Perspective, Part 2.CFA Magazine, 18(3), pp.28-30.

Ohlson, J., Penman, S., Bloomfield, R., Christensen, T., Colson, R., Jamal, K., Moehrle, S., Previts, G., Stober, T., Sunder, S. and Watts, R. (2010). A Framework for Financial Reporting Standards: Issues and a Suggested Model. Accounting Horizons, 24(3), pp.471-485.

Okamoto, N. (2014). Fair value accounting from a distributed cognition perspective.Accounting Forum, 38(3), pp.170-183.

Okamoto, N. (2014). Fair value accounting from a distributed cognition perspective.Accounting Forum, 38(3), pp.170-183.

Osisioma, B., Okoye, E. and Ijeoma, B. (2014). A Model for Implementation of Fair Value Accounting in Corporate Financial Reporting. SOP Transactions on Economic Research, 1(2), pp.10-34.

Patel, C. (2012). A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis. CFA Digest, 42(3), pp.80-82.

Ronen, J. (2008). To Fair Value or Not to Fair Value: A Broader Perspective. Abacus, 44(2), pp.181-208.

Sun, S. (2010). Perspective on Fair Value Measurement. ASS, 6(3).

Swamy, V. and Vijayalakshmi, N. (2012). Fair value accounting in banking - issues in convergence to IFRS. African J. of Accounting, Auditing and Finance, 1(3), p.270.

Véron, N. (2008). Fair Value Accounting is the Wrong Scapegoat for this Crisis.Accounting in Europe, 5(2), pp.63-69.

Véron, N. (2008). Fair Value Accounting is the Wrong Scapegoat for this Crisis.Accounting in Europe, 5(2), pp.63-69.

Whittington, G. (2008). Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View. Abacus, 44(2), pp.139-168.

Laux, C. and Leuz, C. (2010). Did Fair-Value Accounting Contribute to the Financial Crisis?. Journal of Economic Perspectives, 24(1), pp.93-118.

Okamoto, N. (2014). Fair value accounting from a distributed cognition perspective. Accounting Forum, 38(3), pp.170-183.

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