Fair Value accounting Essay

The squabble on the issue of what score measurements will be utilise as the well-worn for financial dicks had caused the on-going debate with various proponents of be standard even today, proponents of every side argues on the basis of their advantages over the new(prenominal)s. Among these contending parties atomic number 18 the proponents of the sporting valuate accounting and those who favored accounting standard found on the historical be. Hitz (2007, p. 324) pointed step to the fore the increasing brilliance of uncontaminating lever as an accounting measurement attributes.Hitz stated that today, the cost and transaction-based reporting archetype is in correct and a new market think of and event-based archetype is on the rise (Hitz, p. 324). Citing the significance of fair esteem accounting, Hitz mentioned that starting out as a specific remedy for the iniquities of the reporting model for certain(p) financial instruments fair value has manifested it self as a overriding measurement paradigm for financial instruments and, more recently, has increasingly been implemented for measurements of non-financial items (Hitz, 324) such as investment property.On the another(prenominal) hand, while Hitz adhere to the tenets of fair value accounting, he recognized the views of the opponents of fair value accounting in concomitant the criticism regarding the questionable reliability of fair value measures notably for model-based estimates relying on managements expectation and projections. However, Hitz asserts that results on empirical research regarding value measurement support the incremental value relevance of fair value disclosure for securities (Petroni and Wahlen, 1995 Barth et al., 1996 as cited by Hitz).The Australian accounting standards Board (AASB) though recognizes other accounting standards it recognizes fair value accounting as the of import financial instruments which applies in various financial processes and transaction withi n AASB. The AASB defines neat value as the amount for which an plus could be exchanged or a liability settled, between knowledgeable, willing parties in an arms continuance transaction (p. 21) Fair value has been the standards in evaluating and managing the performances of a group financial assets or financial liabilities. In the ASSB 7, paragraph 9 to 11 and B 4 the ASSB require the entity to post disclosures about financial assets and financial liabilities it has designated at fair value by profit or qualifying including how it conform to these conditions (ASSB, p. 17).This clearly indicate that fair value accounting as a financial standard instrument have been effectively use and provide significant contribution to the financial situation. This is clearly reflected in the following financial statement from the ASSB as follows investment in equity instrument that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured shall n ot be designated as at fair value through profit or loss (p. 18). The Fair value of any investment plays an important in find out market condition as the fair value of a particular financial instrument is based on the following factors a. the time value of money, b. the credit risk, c. foreign currency exchange prices, d. commodity prices, e. equity prices, f. volatility, and g. honorarium risk.Regardless of the accounting standard used, accounting plays an important role in financial reporting. While M. J. Milnes discussion focus on the importance of accounting in financial management including accounting standards that trail to ontogenys in reported earnings, citing the arguments of Watt and Zimmerman Milne (2002) puts itManagers have greater incentives to favour accounting standards which cut back earnings thereby increasing capital flows, firm value, and their welfare, due to valuate political, and regulatory visitations than to choose accounting standards which reports higher earnings and, thereby increase their incentive compensation (p. 372).Obviously, accounting standards contributes to the financial situation not lonesome(prenominal) of the firm that uses such standards but the entire financial acceptedm. In this pillowcase, Milne partially hinted as to why trillions of dollars went off the global financial market relief sheets and why asset values experience decline. Milne seem to mean that managers choose accounting standards that reported lower earning yet, it increase the firms cash flows, the firm value, and their welfare, due to higher tax and political pressures. In this case the real market value as well as the real earnings were reassigned to somewhere else or as Milne suggest, to cash flows and their value.Given this accounting standard, it is no wonder that management will lobby financial instrument that reduce reported earnings to avoid taxes, regulatory procedures, and all other costs. As Milne stressed,ordinarily, managers a re predicted to have greater incentives to lobby for accounting standards that lead to increase in reported earnings and thereby management wealth. However, since changes in cash flows and stock prices can also be affected by taxes, regulatory procedures, information costs and political costs, managers also have to consider the effects of reported earnings might have on the likelihood that such costs could be imposed on the firm (p. 372).The trillions of dollars that were compose off the global financial market balance sheets and the massive decline of asset values can therefore be attributed to these factors accompanying this accounting standard, and the commentators were partly right in their opinion regarding this massive decline of asset values. However, this does suggest that that money going to taxes, regulatory procedures, political costs, and information costs are lost money and that regulatory procedure should be viewed as negative for business activities. Regulatory proce dures should be viewed in even broader basis that involve all forms of social control and influence.Michael Greiffin emphasized that this should also include not only the corporations legislative requirement but also other rules and directions, such as professional accounting standards and stock exchange requirements (p. 2 par. 3). Graffikin pointed out that regulation is considered desirable where there windfall profits where through some fortuitous event is able to make above expression profits. Regulations should be seen as necessary in the rationalization and coordination of economic exertion so as to organize behaviour of industries in an efficient musical mode (graffikin, p. 3).