Research Korner: Fair Value Accounting

Research Proposal :Analysis of the Most Severe Economic Crisis since 1970

// <![CDATA[ google_ad_client = "pub-0512912564335968"; /* 300x250, created 5/1/08 */ google_ad_slot = "6611326668"; google_ad_width = 300; google_ad_height = 250; // ]]> Research Proposal Analysis of the Most Severe Economic Crises since 1970   Introduction Since 1970, the economic and economic crisis faced in the global market, has faced major economic cries which brought different challenges for the economy and the economic stability of the industries and also the entire nation. It can be said that with the challenges brought by these crisis, the management of banking and economic sector are trying to transform their business approaches.  Primarily, the goal of this propose research is to analyze the most severe economic crises since 1970, specifically this paper will attempt to analyze the root of the economic crises faced in the global market today.   Background of the study The true origin of the economic crisis faced, specifically the credit crunch was due to the credit bubble as well as the under-pricing of risk at period when rapid economic transformation outpaced regulatory controls and made risk assessment more difficult. To be able to understand the beginning of the credit crunch, its background can be attributed to the recovery from the year 2001 economic slump when the international income growth has soared. In many nations, the credit crunches translated into harshly higher real estate prices as well as the abnormally sharp returns in equity markets. Being driven by the low interest rates and the liquidity, the US housing has boomed and lasted for more than a decade during the period in which mortgage companies have extended loans to borrowers that have bad or poor credit records. With this, the brokers who has been provided with bigger commissions has become attractive to different borrowers for availing housing loans that have a minimal down payment with credit checks and tax documentation.             It can be said that the loans are being regarded to as the  sub-prime mortgages, typically charge 2% to 3% points more than those people with less-risky and bad credit profiles, and carry customizable and amendable interest rates that can cause payments to jump in the forthcoming years. Even if such process was considered as efficient, homeowners have observed s that housing prices escalates, that leads them to take out home equity loans that also helps fuel consumer spending. It can be said that sub-prime mortgage simply referred to the provision of loans to borrowers with marginal or weak or bad credit background to avail housing loans. The emergence of the context of sub-prime economic crisis has brought to the credit bubbles and credit crunches that leads to the economic turmoil which have different effects on different institutions in the global market and the mostly affected sectors are the banking and economic institutions. The sub-prime crisis, leading to credit crunches has affected different banking and economic establishments, real estate investment trusts, mortgage lenders, as well as hedge funds. It can be said that this has made different institutions to suffer significant losses as the result of mortgage payment defaults also known as the mortgage asset devaluation.             In the latter part of the first quarter of the year 2008, particularly April 25, 2008, banking and economic institutions has noted sub-prime related losses and write-downs exceeding U.S. $250 billion. With this aspect, the profits at the American banks insured by the Federal Deposit Insurance Corporation has lessen from $35.2 billion to $5.8 billion which comprises 83.5% of the total loss  during the last quarter of the year 2007 versus the recent year because of the increasing loan defaults as well as the provisions for loan losses.  It can be noted that such phenomenon has been the worst bank and thrift performance in the history.             In the year 2007, affected banks have only earned earned $105.5 billion, which is lesser than 27.4% from their profit record of $145.2 billion in the year 2006. Banking institutions in the global market has also experienced such problem like the IKB Deutsche Industriebank which have also experienced relative losses and mortgage scores of lenders have decided to file bankruptcy. On the other hand, the effect of these economic crises has also lead to the resignation of different leaders like the Chief Executive Officers of Merrill Lynch and Citigroup Various industries have attended to consider merger-deal to survive the economic crisis. Moreover, Bear Stearns and Northern Rock have also acquired emergency assistance from higher banks like the Bank of England. Such economic issue has also been felt in the Indian banking and economic institutions which have ventured into USA.             Credit crunches has become an ongoing economic issue that shows itself through the liquidity problems in the banking system which owes to foreclosures.  Such economic issue began with the bursting of the United States housing bubble or the so-called credit bubble (Moyer, 2008; Lahart, 2008 and the intensive default rates in terms of the sub-prime and other adjustable rate mortgages which established higher-risk borrowers with lower revenue and lesser credit history than other prime borrowers.  It has been noted that the causes of the credit crunches can be attributed as varied and complex.  With this economic turmoil due to the credit crunches, the economic losses damaged balance sheets of various economic establishments, as assets were marked down but liabilities remain unchanged.   Aside from this, the credit crunch also reduced and lessens the willingness to lend between industries.     Research Objectives             The main goal of this proposed research is to study the most severe economic crises since 1970, specifically this aims on achieving the following objectives 1.    Identify the most severe economic crises in the global environment 2.    Investigate the roots and causes of these economic crises 3.    Analyze whether these economic crises have significant relationship in terms of the causes and the countries affected. 4.    Examine how companies and countries are able to cope with these economic crises.             Research Questionnaire To address the problem of the study, the following general research questions will be explored: 1.         What are the most severe economic crises since 1970? 2.         Does these economic crises have significant relationship with each other based on the following:             The cause of the economic crises       Countries affected 3.         How do companies and countries adjust to these economic crises?   Significance of the Study This study may be useful in gaining insights on the future of the economy based on the economic crises encountered by different industries and countries. The term ‘future’ is very general and many factors should be involved to determine the general future of the economic sector.             Understanding the roots, causes and effect of these economic crises can help the government and industries to determine ways on solving the challenges posts by these economic crises.             The economic crisis faced by companies and nations is considered as an ongoing economic problem that manifests itself with the liquidity issues in the banking system and other economies in the global market. It has been realized that one of the reasons for this economic crisis are very varied and complicated. In this regard, controlling and comprehending the ripple effect through the global economy as well as the management and marketing implication post critical challenges for investors, insurance companies, businesses, banking and economic industries as well as government institutions.    Literature Review Concept of the Sub-prime Crisis               The sub-prime crisis is an ongoing economic issue which manifests itself through liquidity problems in the banking system that owes to foreclosures which accelerated in the United States which starts in latter period of 2006 and triggered a global financial crisis during 2007 and 2008. This economic issue started with the bursting of the US housing bubble (Moyers, 2008; Lahart, 2008) and intensive default rates on sub-prime and other adjustable rate mortgages (ARM) created to higher-risk borrowers with lower revenue or lesser credit history than those prime borrowers. It is noted that the reasons for the sub-prime crisis are complex and varied. Because of this, understanding and controlling the ripple impact through the global economy posts critical challenges for businesses, investors, and government institutions.              The sub-prime lending is regarded as the practice of making loans to borrowers that do not qualify for market interest rates because of different risk aspects, like size of the down payment, income level, employment status and credit history. The amount of US prime mortgages was approximately $1.3 trillions as of March 2007 (MSNBC, 2008), with over 7.5 million first-lien sub-prime mortgages outstanding (Bernanke, 2007).  More or less 16% of the loans of sub-prime with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure process as of October 2007, nearly triple the rate of 2005 (Bernanke, 2007). By January 2008, the delinquency rate had increased to 21% (Bernanke, 2008). The sub-crime crisis can be attributed to various factors. These factors include the incapacity of the homeowners to make their mortgage payments principally because of the loss of employment or health related aspects; insufficient mortgage I like short fixed term and buy downs adjustable rate mortgages couples with incentives fast rising adjustable mortgage values, poor judgement either by the lender and/or by the borrower. In addition, the declines of home prices have made the re-financing more complex. Due to the changes in line with securitization, it has been noted that the risks is related to the inability of the homeowners to attain mortgage payments had been distributed widely, with a series of consequential effects. Principally, there are four primary categories of risk involved with sub-prime crisis. These include credit risk, liquidity risk, and asset price risk and counter party risk. Specifically, the business organization is most interested in keeping counter party risk at low level since the volume of the bank’s total portfolio is largely determined by its trading activities. It was evident that counterparty risks associated with derivative trading activities are rooted among over-the-counter (OTC) transactions wherein additional expense or reduced revenue that would result from the replacement of the transaction by an equivalent position in the event of a default is evaluated and given necessary action. As such, there is a need for the people within Northern Rock organization to conceptualize means of minimizing the losses in terms of revenue and expenditure in over-the-counter transactions that the bank engages in. Moreover, counterparty selection is vital in order to maintain the strong hold of the business organization in the international banking industry.     The cross-product master netting agreements with business partners so as to reduce counterparty risks allowed all claims and liabilities not yet due to be offset against each other in the case of counterparty default. This served as contingency action in order to keep the expenses of over-the-counter transactions at minimum level while taking into account other factors and variables which causes loss in revenue.  The use of global multi-stage limit system to9 address credit risk exposure in credit and counterparty risk management by taking into account the replacement costs as well as other potential future price fluctuations will provide a comprehensive understanding and holistic view of the economic environment of the international banking industry guaranteeing safety nets among active participants in the business of global banking transactions. Other measures of unforeseen and emergent cases of loan loss allowances initiated by the management of Northern Rock include a value at risk procedure in quantifying collateralized transactions, and simulation procedure for unsecured transactions to assess the portfolio and correlations effects for calculating exposure.  Since it was revealed that the potential exposure could be reduced significantly in currency and interest rate transactions, succeeding business operations of the bank should be made to characterize these descriptions so as to contribute to the overall reduction of loan loss allowances.  In line with the credit risk, this risk is assumed by the bank which originates the loan. However, because of the major changes in securitization, credit risks are often transferred to third-party investors. Herein, the rights to mortgage payments have considered repackaging into a variety of complex investment vehicles, which generally categorized as collateralized debt obligations or mortgage-backed securities (MBS). Essentially, CDO is a repacking of present debt, and in previous years MBS collateral has generate a large proportion of issuance. In exchange of buying CDO or MBS and assuming credit risk, third party investors have gained a claim on the mortgage assets and related cash flows, which became collateral in the event of default.             On one hand, in line with asset price risk, CDO and MBS asset valuation is multifaceted and related fair value or mark to market accounting is subject to broad interpretation.  The valuation is derived from both the existence of viable market and the collectibility of sub-prime mortgage payments into which such assets can be traded which are interrelated. The rising mortgage delinquency rates have decreased demand for such assets. Banking and other institutional investors have identified substantial losses as they revalue their mortgage-backed securities downward. Several industries which borrowed money through CDO or MBS assets as collateral have encountered margin calls, as lenders provided their contractual rights to get their money back.  There is a growing consensus about the view on whether fair value accounting should not be suspended or temporarily modified, as large write-downs of complex value MBS and CDO assets might worsen the crisis (Gross, 2008).             In line with the liquidity risk, many industry rely on access to short-term funding market for operations of cash, these include the commercial paper and repurchase markets. Industries and structured investment vehicles often get short-term loans by issuing commercial paper, CDO and pledging mortgage assets as collateral.  In this regard, the investors provide cash in exchange for the commercial paper, which receive money-market interest rated. Nonetheless, due to the concerns about the value of the mortgage asset collateral associated with sub-prime and Alt-A loans, the capability of various industries to issue such paper has been impacted (Barr, 2007).  Furthermore, the interest rate charged by some investors to give loans for commercial paper has substantially increased above the historical level (Unmack, 2007).   Research Methodology             This proposed research is to determine the most severe economic crisis since 1970.  To achieve the objective of this study, descriptive approach will be used. Although both the qualitative and the quantitative research methods were used for the completion of this research activity, the study operates primarily under the qualitative research approach wherein the quality of the information gathered rather than the quantity of sources that are available to the researcher, is highly recommended so as not to compromise the quality of the data (Snijders, 1992; Faugier & Sergeant, 1997). Because the highly relevant aspects of the research study are characterized and classified as qualitative elements, standard measures that enabled quantification of the concepts will not meet the information needs of the project. These include the analysis of each of the economic crisis that hits the world. The exploratory research design served as the guiding framework for the execution of the entire research project. Exploratory research normally involves open-ended study, unguided by theory and intended to provide a new body of empirical knowledge from which theories might be postulated (Yin, 2003:22, Robson, 2002:59 & 399). As such, the case study research approach provided the most ideal methodology since the study calls for the need to conduct a holistic, in-depth investigation of the topic presented (Feagin, Orum & Sjoberg, 1991). This contributed to the knowledge of individual, group, organizational, social, political, and related phenomena being studied (Yin, 2003). Since the research project aims to enlighten identify the most sever economic crisis, assessment of each of the financial crisis will be considered. As such, the research activity employed means and measures to provide valid and reliable analyses of the economic crisis under the qualitative research approach. Hence, the entire research activity was composed of three data gathering procedures in order to identify the most sever economic crisis. These data gathering procedures include (a) interviews among economists and informed individuals (b) the interdepartmental ranking of economic crisis based on its major effect. and (c) in-depth case study of each of the economic crisis.   Coding and Data Interpretation The qualitative data collected through the key informant interview method were used and manipulated by utilizing the open-coding and axial coding procedures (Fico, Lacy & Riffe, 1998). This facilitated easier analysis of the qualitative information gathered as patterns, similarities and differences of the responses made by the informants of the study were classified and categorized to form logical data analysis and presentation. As such labels, words, and statements that were used by the participants to denote or connote similar concepts and themes were grouped and analyzed accordingly to summarize the core findings of the study (Kerig & Lindahl, 2001; Fairclough, 2003). Each of the concepts that were discussed during the key informant interview method were analyzed and related to the research questions and objectives so as to come up with sensible findings and results. Moreover, to facilitate the qualitative data analysis of the concepts of the study, content analyses of the responses of the interviewees were conducted. Defined, content analysis is the systematic, replicable technique for compressing many words of text into fewer content categories based on explicit rules of coding (Markel, 1998; Fico, Lacy & Riffe, 1998; West, 2001). It is not restricted to the domain of textual analysis but could also include the categorization of illustrations or drawings (Wheelock, Haney & Bebell, 2000) as well as behaviours of individuals that are video tape recorded (Stigler et al, 1999). These characteristics of the content analysis enable researchers to sift through large volumes of data with relative ease in a systematic fashion (Markel, 1998; Fico, Lacy & Riffe, 1998; West, 2001). Content analysis is a useful technique that allows the discovery and description of the individual, group, institutional, or social attention or focus of the study  (Kulm, Dager Wilson & Kitchen, 2005) which opens opportunities  to correctly interpret the collected inferences and data and can be corroborated using other methods of data collection. This particular systematic qualitative data processing has been very useful in the entirety of the study since the content analyses facilitated organized and logical sorting of large data from interviews in order to arrive at simpler concepts for analysis and discussion. Moreover, in-depth interpretation of the specific cases that were explored was made possible so as to come up with holistic analysis of the findings of the study. As such attributes, constructs and other similar connotations of the topic of the study were grouped together to synthesize the results of the study as well as to mange the data more effectively and efficiently. In the case of the quantitative data collected in the interdepartmental website ranking, the descriptive statistics in the form of frequency through tallies was primarily used so as to present quantitative data descriptions in manageable forms.   Validity and Reliability This study employed qualitative research method (key informant interview) as the primary data collection procedure. Thus, ensuring the validity of the accumulated data is considered to be the most crucial stage of the research endeavor. This aspect of research was attended by the researcher because the validity of the data dictates the quality of the outcome of the accomplished procedures. Since a methodology is always employed in the service of a research question, validation of the inferences made on the basis of data from one analytic approach demands the use of multiple sources of information through validation study built into the design. In qualitative research, validation takes the form of triangulation which lends credibility to the findings by incorporating multiple sources of data, methods, investigators, or theories (Kaplan & Duchon, 1998; Foss & Ellefsen, 2002; Mingers, 2001). However, content analysis itself is only valid and meaningful to the extent that the results are related to other measures (Markel, 1998; Fico, Lacy & Riffe, 1998; West, 2001) which necessitated the use of triangulation method. The triangulation research strategy in which the use of multiple sources to enhance the rigor of the research (Robson, 2002:174) helped in the in-depth case analysis of the paper conglomerating three different aspect of the study which includes the (a) background information regarding the new initiatives and characteristics of the Dubai municipality governance while (b) classifying the structure of the organization into huge, middle and small department categories and (c) and the e-Governance practice in the United Arab Emirates focusing on its online services. Moreover, the interdepartmental ranking of the websites supported the researcher’s aim to present accurate and truthful findings following the principle of triangulation.   Reference   Faugier, J & Sargeant, M 1997, ‘Sampling hard to reach populations’, Journal of Advanced Nursing, Vol. 26, pp. 790-797. Feagin, J, Orum, A & Sjoberg, G (Eds.) 1991, A case for case study, Chapel Hill, NC: University of North Carolina Press, pp.20-26. Fico, FG, Lacy, S & Riffe, D 1998, Analyzing Media Messages: Using Quantitative Content Analysis in Research, Lawrence Erlbaum Associates, Mahwah, NJ Flick, U 1998, An Introduction to Qualitative Research, London: Sage. Foss C, & Ellefsen B 2002, ‘The value of combining qualitative and quantitative approaches in nursing research by means of method triangulation’, Journal of Advanced Nursing, vol. 40, no. 2, pp. 242-8. Gliner, JA & Morgan, GA 2000, Research Methods in Applied Settings: An Integrated Approach to Design and Analysis, Lawrence Erlbaum Associates, Mahwah, NJ. Green, JJ 2005, Design, Methods and Measurement for Applied Research, (PowerPoint Presentation) Institute of Community-Based Research, Division of Social Sciences/Centre for Community and Economic Development, Delta State University. Guba, E & Lincoln, YS 1998, 'Competing paradigms in qualitative research', In Denzin, NK & Lincoln, YS editors, The Landscape of Qualitative Research: Theories and Issues, Thousand Oaks, CA: Sage. Lahart, J. Egg Cracks Differ In Housing, Finance Shells. Online available http://online.wsj.com/article/SB119845906460548071.html?mod=googlenews_wsj. Retrieve December 13, 2008, 2 Lim, M. Subprime mortgage meltdown: Roots of the crisis. Online available http://opinion.inquirer.net/inquireropinion/talkofthetown/view_article.php?article_id=101568. Retrieve December 13, 2008. Moyers, B. Online available http://www.pbs.org/moyers/journal/06292007/transcript5.html.  Retrieve December 13, 2008, 1. Yin, Robert K. (2003) Case study research: Design and methods (3rd Edition), Sage.

Research Proposal :Analysis of the Most Severe Economic Crisis since 1970

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Fair Value Accounting

Fair Value Accounting     Introduction In accounting, fair value is usually used for assets that are meant to be accounted for at market prices, but a 'market' might not be available, and therefore an estimate of the 'fair value' is made. Usually this is not used where an asset or liability has a historical cost and is being depreciated or amortised. And is normally not used for assets where an established market price can be identified (Scott, 2009). As indicated in the book of Scott (2009), most of the current accounting system is meant to control two distinct types of information asymmetry: adverse selection and moral hazard. Controlling adverse selection requires a decision usefulness approach that emphasises fair value accounting numbers that often fluctuate. Unfortunately, controlling moral hazard requires that income figures be highly correlated with management effort, which argues for the use of "hard numbers."  With this, this paper discusses and analyses the factors in accounting procedures and issues in fair value with respect to Australian Accounting Standard Board (AASB). The main purpose of this paper is to discuss the factors involved in accounting procedures and issues in fair value accounting. Aside form this analysis, determination of fair values of assets in a business combination will be discussed since there are accusations in which Fair Value Accounting (FVA) deepening the current financial distress whilst proponents argue FVA is providing investors with information about the value of firm’s assets. In addition lobbyists from the banking industry have effectively had politicians use “pressure” on Accounting Standards Boards to redefine FVA.   Decision Usefulness With respect to the current stance of global finance and usefulness of accounting in making decisions, the report of Russell Berman last April 2009 in AccountancyAge.com stated that US Treasury Secretary Tim Geithner’s recently announced proposals for US recovery have attracted extreme criticism in many quarters for failing to address the issue of Fair Value Accounting. As reported, Alex Pollock of the Washington-based American Enterprise Institute and a long-standing critic of mark-to-market accounting rules sees a missed opportunity for a more radical overhaul.[1]  Experts argued that the failure of US to pay attention on Fair Value Accounting created problems and deepening the global finance crisis.  According to the report of Berman, Alex Pollock stated that “a comprehensive plan would have to fix fair value accounting”. Similar to other accounting procedures, fair value accounting was used for making appropriate decisions (Scott, 2009). Businesses in Australia are fast evolving. They are developing with respect to the changes of global market and issues in valuing. The focus on valuation has changed from nonfinancial items to financial assets and liabilities reflecting differing concerns over time. The use of market values for nonfinancial assets and, in some cases, inflation adjustment for monetary items was discussed intensively across the commercially developed world. A number of standard-setting bodies promulgated disclosure requirements or allowed the use of alternative accounting standards in this area under the title “current cost” accounting, which generally required the use of entry prices or their surrogates for nonfinancial assets but maintained historical cost for financial assets and liabilities with the possibility of some adjustment for general price changes. In accordance to this development, extensive accounting and auditing procedures must be practiced for making effective decisions. This includes everything from external audits of accounting management policies and procedures to internal reviews of quantitative exposure measurement models. In essence, this process involves the evaluation whether or not its management process is working properly and efficiently. This must be done to assess if the company addresses the problems and risks being identified in the first process. Without this step, Australian businesses would not be able to come up with policies and regulations regarding Australian Accounting Standard Board (AASB), and would not be able to know if their measuring, monitoring and controlling processes are effective enough to suggest improvement of their operation and profit.               Positive Accounting and Agency Basically, accounting processes like Fair Value Accounting generates summary measures of transactions and events that occurred during a period and of net assets at the balance sheet date. This process involves a great deal of aggregation, which is done via the recognition and measurement of assets and liabilities. Different valuation concepts are used. For example, some assets are measured at historical cost, others at fair value or market value, discounting is considered for measuring certain items and not for others. With this, we may say that financial accounting and reporting like Fair Asset Accounting should be governed by standards or rules that are developed by standard-setters or legal bodies on a national or international level. The objective is to provide decision-useful information to the stakeholders of the firm, often by focusing on information that investors in capital markets demand, but also on stewardship. Financial reports are audited by independent public accountants. They are subject to scrutiny by the board of directors and supervisory boards, respectively, or by audit committees. In many countries there is some form of public oversight by private boards or by government institutions, and enforcement is carried out by such institutions or the courts. All these institutions are supposed to assure the quality of financial reports.          In finance, accounting and in accordance to the context of Australia, there are many variables that we have to consider such cash flow and profits, the Profits and Loss Account and Balance Sheet, and financial ratios. Aside from these factors, the “fair value” concept in businesses is also very vital to their development. Actually, it is all about the policy in which a certain business is obliged to submit financial reports in accordance to financial standards set by the country (Atril & Mclaney, 2004). So let say in Australia, financial reporting should comply with Australian Accounting Standard Board (AASB). Basically, financial reporting is very vital to the development of a certain organisation since it is the distinction whether the certain organisation are growing or not (Atril & Mclaney, 2004).  And with regards to the issues and criticisms of Fair Value Accounting: 	<li class="MsoNormal" style="text-align: justify; line-height: 200%"> 	Fair-value measurement aims to 	provide information about (potential) market prices of assets and 	liabilities. However, only in a world of perfect and complete markets can 	the fair value be precisely defined (van Deventer 	DR 2008). But in such a world there would be no need for financial 	reporting,  (Riahi-Belkaoui, A 1998) which contains market prices. The 	information on quantities would be sufficient, since all users could find 	the relevant prices. In the real world, markets are imperfect and 	incomplete, and the standard-setter has to decide which market is relevant 	(Pike, R & Neale, B 1999).  Even if he can make this decision, there are 	differences between a market price and a value in use. Assuming a rational 	investor, he or she will only invest in an asset if the value in use exceeds 	the market price. This investment creates a positive net present value. 	Therefore, the information on market prices can only be a conservative 	estimate of the value in use at the time of investment.</li> 	<li class="MsoNormal" style="text-align: justify; line-height: 200%"> 	Selling prices are 	informative, but only if the enterprise really wants to sell the asset. 	Selling prices make sense for trading securities, but not for noncurrent 	assets like property, plant, and equipment, especially for special 	machinery, or for financial investments.</li> 	<li class="MsoNormal" style="text-align: justify; line-height: 200%"> 	For many assets and 	liabilities, we cannot find market prices by looking closely at the markets. 	Instead, we must deduce the market prices by using valuation models (van 	Deventer DR 2008). For example, think about financial derivatives or 	some rental properties. The important questions are, what models are 	admissible and what are the realistic parameters?</li> 	<li class="MsoNormal" style="text-align: justify; line-height: 200%"> 	Selling and buying prices of 	individual assets and liabilities are not good proxies for the contribution 	that such assets and liabilities make to the value of the firm. This value 	cannot be identified by individual valuation, item by item, and then adding 	the values. This addition would only be sufficient if the firm had no 	synergies and self-produced goodwill.</li>   Given the threats and the management in fair value accounting procedures it must pass through, it is essential to discuss some possible strategies its implementation. From the policies given by Australian Accounting Standard Board (AASB), Australian businesses may manage them by using existing assets or existing resources as a counter troubles, and involves improvements to existing methods and systems, changes in responsibilities, improvements to accountability and internal controls.             Regulatory Stringent approach to accounting policies and standards is a tool for the government to measure the legitimacy of an entity with regards to its relationship with the public and environment (Deegan & Rankin 1996 p. 60).  Financial reporting is one of the factors that need consideration not only by the Australian business organisations but also by the global community especially to those who are responsible in setting up the international financial reporting standard (IFRS) and AASB (Australian Accounting Standards Board 2009) to regulate accounting practices.  In line with this, the values reported by a certain company should conform to the standards given by AASB, IFRS or GAAP.  Fair values given to companies should also comply with their status in the market (van Deventer DR 2008).  Meaning, fair values should reflect to the factors in business like its earnings, growth and market.  Actually, the Financial Accounting Standards Board (FASB) in 2004 proposed guidance on how entities should decide fair value assessments for financial reporting purposes. The guideline would concern generally to financial and non-financial liabilities and assets considered at fair value beneath other authoritative accounting assertions. Lack of one single reliable outline for giving fair value measurements and developing a consistent estimate of a fair value in the deficiency of quoted prices may create incomparability and inconsistencies. The point of this guide is to eliminate the inconsistencies by constructing a solid support to be used in any fair value assessments (Australian Accounting Standards Board 2009).             Those who hold on to the fair value measurement system uphold that it has many advantages, pointing out two major arguments. The first is significance. Fair value measurement of an entity’s assets and liabilities results in escalating significance of financial statement information (Thomas, W 2002), so that readers of the financial statement will now adjust tremendously in interpreting entity reports. Financial strength, liquidity and cash flow become effortlessly assessed.             The second major issue is consistency. A situation case where some financial statement items are accessible at fair value, while others are offered at cost may confuse financial statement readers (Thomas, W 2002). In addition, fair value measurement may cause early detection of unrealised profits as a result of an augment in market value. Moreover, a measurement of fair value for unquoted items imposes the use of authorities, placing an important cost burden on companies in order to acquire a consistent valuation.   Conclusion The intention of standard-setters with regard to financial items is to illustrate the economic value of each class of assets and liabilities as if they were independent from each other and other entity resources; these values were linearly additive and as far as potential purged of super profits and managerial purpose. This outlook relies on neither a strong theory nor on empirical evidence. It is really based on an economy with all relevant markets being well organised and in perfect equilibrium, which results in markets consistent with the standard-setters' scenario and in market prices that reflect economic values.  As shown, this paper has examined the issues pertaining to Fair Value Accounting.  Ideally, fair values embody the market's expectations concerning assets and liabilities. Thus, AASB, IFRS or GAAP wishes to substitute the views of the market for those of the management. They see present value measures as providing an estimate of fair value only where market prices are unavailable. Only when a market price for an asset or liability or for similar assets and liabilities is absent is a present value valuation necessary, as otherwise the marketplace's view of present values of such items is embodied in market prices that are held to capture all elements relevant to asset value. The standard setter's such as AASB, IFRS and GAAP major argument for fair value is that the accounting valuations should, ideally, recognise the amount of asset cash flows and their timing and expectations of changes therein, the time value of money, the price of the risk inherent in assets, and other factors. It is argued that it is only fair values that capture just these factors. Using managerial estimates includes additional items to those listed above that reflect differing managerial information and different preferences to the market. Allowing for these in accounting would mean that identical items would be valued differently. The underlying wish is for accounting like Fair Value accounting to state things “as they are”, free of any managerial manipulation.   References: Australian Accounting Standards Board 2009, viewed 3 June 2009, <http://www.aasb.com.au>   Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.   Deegan, C & Rankin, M 1996, "Do Australian companies report environmental news objectively? An analysis of environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority”, Accounting, Auditing and Accountability Journal, vol. 9. no. 2. pp. 50-67   Pike, R & Neale, B 1999, Corporate Finance and Investment Decision and Strategies, 3rd edn., Pearson Education Limited, England.   Riahi-Belkaoui, A 1998, Financial Analysis and the Predictability of Important Economic Events, Quorum Books, Westport, Connecticut.   Scott, W 2009, Financial Accounting Theory. Prentice Hall. ISBN:9780132072861   Thomas, W 2002, ‘The rise and fall of Enron; when a company looks too good to be true, it usually is’, Journal of Accountancy, 1 April.   van Deventer DR 2008, Fair-Value Accounting, CDOs and the Credit Crisis of 2007–2008, viewed 3 June 2009,  Bank Accounting & Finance. <http://www.kamakuraco.com/Portals/0/doclibrary/BAF_21-06_08_Deventer.pdf>   	 	 		 		 		 		[1] 		From 		http://www.accountancyage.com/accountancyage/analysis/2239867/reforms-slammed-ducking-fair

Fair Value Accounting

Fair Value Accounting Introduction In accounting, fair value is usually used for assets that are meant to be accounted for at ...

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