Question 1
Fair Value Accounting
The international accounting standards that have been developed reveal that the historical cost accounting will be replaced with the fair value accounting and thus will remove the ambiguity related to the historical cost accounting. It has been argued that the historical cost accounting does not reveal the complete financial position of the firms and thus this will be made possible by fair value accounting. Australian Accounting Standards (“AASB”) No. 1041 gives the definition of Fair Value and the method for measurement of fair value which include fair value measurement of liabilities, measurement of fair value of instruments when the market is not active. In the coming sections the regulatory framework and the usefulness of fair value accounting and its implication in Australia is discussed. Further the consequences of application of fair value accounting are studied.
Regulatory Framework
The financial reporting framework was developed with a view to provide the complete and true information to the investors so that the assistance is provided for the decision making so that the businesses can be made in a fair manner based on the real values of the assets and liabilities.
As mentioned above the AASB 1041 gives the definition of fair value. The fair value is defined as the amount for which an asset can be exchanged or the liability of the company be settled by with the firms in complete knowledge and willing to exchange the assets of the firm. The fair value is the best use of the asset for which the other firms and participants are ready to pay.
The framework also postulates that non-current assets will have to revaluated based on the fair value as discussed in AASB 1041 and that any increment in value of non-current assets is directly credited to the asset revaluation reserve and in case of decrement the asset revaluation reserve is debited (DTF, 2002). In case of depreciable assets the balances occurring because of revaluation must be credited to the asset to which they have been depreciated. Thus the asset account is increased or decrease depending upon whether the revaluation has resulted in increment or decrement of value.
The recoverable amount test as mentioned in AAS10 applies to those non-current assets that are being measured at historic cost and is also applicable only if benefits arising from these assets in future can generate cash flow for the company. The recoverable amount related to an asset is not subjected to revaluation and have to be expressed as expense when showing the financial performance. This is applicable only to those assets that are subjected to the AAS 10.
This is the basic regulatory framework that is in place for the implementation of the fair value to non-current assets and depreciable assets as per the Australian Accounting Standards.
Benefits of Fair Value Accounting
There has been extensive study wherein relevance of fair value to the Australian firms has been studied. AASB 139 which is for financial instruments states that the financial instruments have to be measure based upon the fair value (Percy, Stewart & Hassan). It has also been viewed that the earning level beyond the historical value is low and the loss or gain that are unrealized which are beyond the book value are also very low.
The benefits of fair value accounting include that the amount mentioned are accurate and are timely. Also since the fair value accounting is a market based approach the companies would need to update the values more frequently and thus the more updated reports will be available which will benefit the investors. Under fair value accounting the manipulation of accounting will also be limited as it will be market based approach and thus the will indicate the economic conditions prevailing in the market.
AASB 1033 define the financial instruments which include It has been viewed that the measuring of financial instruments based on the ability of them to become asset or liability for a firm. The financial instruments thus include Receivables, convertible preference shares, investments and payables. Thus the advantages of fair value accounting of financial instruments include relevance of fair value method, application of fair value accounting is practical approach, and the application of fair value accounting is obtainable at a reasonable cost (Hancock, 1996).
Consequences of Fair Value Accounting
It has also been viewed that the disclosure of fair value estimates of banks has considerable effect on the share price and thus the relevance of fair value accounting can be estimated (Barth, 1994). According to Khurana and Kim (2003) the fair value provides more in depth detail of the assets of the firm. According to the study the fair value accounting provide more powers to the investors in studying the financial positions of the firm. A study was conducted for the 354 firms listed on the ASX and the models were developed based on the information that was provided in the annual reports of these organization that provide necessary information that net fair value information provided by the firm and the fair value in the market. The model developed also provided the information whether the fair value information provided more powers and relevance information to the investors.
This study that was completed proves that the fair value accounting is relevant however it may be limited to financial instruments Thus the argument that the fair value accounting provides with more power and thus the complete and relevant information is true in the context of financial instruments however the study done on other sectors show that the fair value accounting have revealed mixed results. The fair value accounting has impacted a large number of sectors and as discussed above banking sector has been majorly impacted by this.
Conclusion
<<Usefulness of fair value accounting>>It can be argued that redefining Fair value accounting is necessary in order to recognize or derecognize the assets but it is very important that the complete application of fair value accounting is followed as it will help in standardizing the accounting of the firms and will ensure that the complete is fully robust (Nelson, 1996). It has also to be ensured that the various accounts resulting from the revaluation of the non-current assets and the depreciable assets. But once the fair value accounting is followed which is after 30th June 2012 these issues will reduce. Also the AASB has made necessary modifications by taking issues being faced as mentioned in the FASB and the fair value accounting in other countries where it has been implemented. For example the FASB addresses the issue of impact of fair value accounting of measurements basis of fair value, impact on the banks and other financial institutions etc. Thus the application of fair value accounting is positive and it may take some time for the firms to make necessary changes to the system but once in place will be beneficial for the firms, investors and the government bodies.
Question 2
It has been believed that the ethical issues have always prevailed in the system and thus almost every time the information is not revealed at time knowingly unless bounded by regulatory framework. This can be discussed with respect to the Kyoto Protocol wherein the impact of business on the environment has been highlighted and thus lay importance to the environmental accounting and reporting.
There have been a lot of studies on the social responsibility of the corporate and the need of a system for the comprehensive accounting as in the absence of which the responsibility is rarely seen to be shared and thus steps have been taken to minimize the effects on the environment. It has been viewed that there are climatic changes and thus the environment has been impacted and thus the social responsibility of the corporate is lagging towards the direct impact that is being made to the environment. Thus the reporting mechanism has to be in place which provides the relation between the corporate responsibility of the corporate and the environmental danger that is posed by the industry. This will enable to assess the impact of the industry on the environment and thus the complete basis for the accounting of the corporate is developed.
There is no doubt that the managers have to keep check and account for the environmental effect of business apart from the financial and economic effects. This need is growing as unless there is no mechanism that can account the corporate the complete accountability cannot be made the also if the steps are taken by the corporate it cannot be ascertained that the level of account is sufficient as compared to the impact of the business of the corporate on environment.
Thus there is need to have a change in the accounting system from the traditional accounting system which has a very narrow scope and the first initiative in this direction has been made by the Kyoto Protocol and Clean Development Mechanism. It has to be clearly understood by the managers the need for accounting. Thus in the process the reliability of the theoretical models that have been developed need to be understood and analyzed (Jones, 2010). This brings in another insight into whether non monetary alternatives are there for the accounting of such activities. This leads to the concept of corporate social responsibility wherein companies make contribution to the society as an obligation towards the society which is completely obligatory.
However another aspect of the business is the corporate social responsibility which in a way is solution as thought by the managers to pay off so that the social responsibility is fulfilled although another aspect of social issues may not have been revealed. Thus in a way it might be said that it is kind of give and take (Jones & Haigh). Corporate Social responsibility is the thinking of the company wherein a thought is provided to social issues, like some firms may invest part of their profit in the building of infrastructure in and around the area of their operation. Thus in this way the corporate make up for the impact which the business might have on the environment or the social life due to their operations.
The social accounting has been widely acknowledged but has not been organic and jointed. This is because of several reasons. These include the coherent efforts being put up, removal of confusion and irregularities in the system. Due to the irregularities and the confusion and the potential threats and also the question mark on the level of contribution by different sections has lead to the acceptance of the system. Such system has to be addressed globally as the efforts made in one part of the world will not lead to the building of the complete system until the contribution is also made by the other parts of the world.
The accounting for environmental impact is one of the aspects of social and environment accounting but these also include human rights, working conditions for employees and also in a way the impact of the product on the social life. It has thus to be understood there are different aspects of the social accounting (Gray, 2008). These different aspects gain importance from time to time. The main issue is that these issues have never been coherent and studied together in order to come up with the solution for all the issues. However from late 1980s a concern has been shown towards this and the steps have been taken up so that the complete regulatory framework is developed.
Thus concluding the essay it can be said that the managers have to be made responsible for making the efforts and communicating to the shareholders on the environmental and social impact of activities and thus be made accountable for the same (Hughes, Sander. and Reier, 2000). Although steps have been taken across the globe and at times initiatives have been there from the managers, the complete framework has to be developed in order to ensure that the complete accountability has been allotted and ensured that the obligation is complete (Gray, Dillard & Spence, 2009). This will ensure that all the businesses are contributing to the social and environmental accounting which the traditional accounting system had the inability to capture. However steps are being taken and the study has been done so that non monetary solutions to such accounting could be made.
References:
Barth, M.E. (1994). Fair Value Accounting: Evidence From Investment Securities and the
Market Valuation of Banks. The Accounting Review. 69 (January):125.
Hancock, P. (1996). Financial Instruments. Accounting Forum. 19(4):385398.
Khurana, I.K., and M.S. Kim, (2003). Relative Value Relevance of Historical Cost vs Fair
Value: Evidence From Bank Holding Companies. Journal of Accounting and Public
Policy,22 (2003):1942.
Percy M, Stewart J & Hassan M S B. (n.d.) The Value Relevance of Fair Value Disclosures in Australian Firms in the Extractive Industries
Nelson, K. (1996). Fair Value Accounting for Commercial Banks: An Empirical Analysis
of SFAS 107. The Accounting Review. 71:161182.
Department of Treasury and Finance, (2002), Guidelines for the Introduction of AASB 1041
Revaluation of Non-Current Assets
Gray R. (2008). Social and Environmental Accounting and Reporting: From Ridicule to Revolution?. Issues in Social and Environmental Accounting. 2 (1), Pp. 3-18
Hughes, S. B., Sander, J. F. and Reier, J. C. (2000) Do Environmental Disclosures in US Annual Reports Differ by Environmental Performance?, Advances in Environmental Accounting and Management. 1 pp141–61.
Rob Gray, Jesse Dillard & Crawford Spence (2009): Social Accounting Research as If The World Matters, Public Management Review, 11:5, 545-573
Jones M.J. (2010). Accounting for the environment: Towards a theoretical perspective for environmental accounting and reporting. Accounting Forum 34 (123–138)
Hopwood A.G. (2010). Accounting and the environment. Accounting, Organizations and Society 34 , 433–439
Jones M.T. & Haigh M. (n.d.). The Drivers Of Corporate Social Responsibility: A Critical Review.
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