Problems of determining the fair value of assets (IFRS 13) in conditions of closed markets and forced relocation of property

The Fairness of Fair Value: SFAS 157, Irving Fisher and GECON

Although fair value is not a new measurement attribute, the interest of discussing fair value has been aroused by the release of new accounting standards. This article decodes fair value measurement again from four aspects respectively. Fair value measurement attribute is for asset measurement in the end, a kind of initiative measurement from master-slave relationship. As a matter of fact, fair value measurement is a measurement process. However, considering the special time, the relationship of exclusiveness does not exist between fair value and other measurement attributes. Simultaneously, fair value refers to fairness of value in special time and it is meaningless for fair value without the concept of time.

A total of 86 financial managers participated in an experiment designed to assess the reliability of Level 3 fair value (U.S. GAAP) and entity-specific (IFRS) measurements of performance obligations. The study focuses on asset retirement obligations because, to date, under U.S. GAAP they are the sole performance obligation measured at fair value. The findings indicate that with a benchmark, managers tend to manage earnings less with fair value measurements than entity-specific measurements. In contrast, without a benchmark, managers tend to manage earnings irrespective of whether the obligation is measured using fair value or entity-specific value. Findings suggest that to the extent IFRS entity-specific measurements are associated with internally derived benchmarks, they may be more reliable than Level 3 fair value U.S. GAAP measurements that will not have benchmarks.

The main provisions of IFRS 13 «Fair Value Measurement » have been researched as well as its critical analysis has been conducted. Comparison of the previous and the new definition of the concept «fair value» has been done on the basis of what the shortcomings of the previous definition have been highlighted, the characteristic features and advantages of new definition from IFRS 13 «Fair Value Measurement » have been outlined. It has been proved that new interpretation of the concept of «fair value» is narrower and more accurate than the previous, it clarifies the subject matter, subjects of transactions, as well as the date of its execution. The scheme of estimation at fair value as well as model of fair value determination according to IFRS 13 «Fair Value Measurement » has been presented. Methods of measurement at fair value and the fair value hierarchy have been researched. Some disadvantages of provisions of IFRS 13 «Fair Value Measurement » on the basis of its analysis have been highlighted, uncertainty is essential among them in which fair value should be applied.

Part 1: Introduction 1. Introduction: The Nature of Fair Value 2. The Use of Fair Value in IFRS 3. What SFAS 157 does and does not Accomplish 4. The Case for Fair Value 5. Fair Values: Imaginary Prices and Mystical Markets Part 2: Theoretical Analysis 6. Recent History of Fair Value 7. Fair Value and Valuation Models 8. Whither Fair Value?: The Future of Fair Value 9. Between a Rock and a Hard Place 10. Fair Value and Capital Markets 11. Fair Value: The Right Measurement Basis? 12. Measurement in Accounting and Fair Value 13. CCA: An Unsuccessful Attempt to Change the Measurement Basis 14. Alternatives to Fair Value 15. The Relevance and Reliability of Fair Value Measurement 16. The Fair Value Principle and its Impact on Debt and Equity Part 3: Fair Value in Practice 17. Fair Value: A Cautionary Tale from Enron 18. The Insurance Industry and Fair Value 19. Fair Value Measurement for Corporate Entities, Insurance Companies and Retail Banks from an Investment Banker's Perspective 20. Fair Value and the Auditor 21. Fair Value Accounting in the USA 22. A Japanese Perspective on Fair Value 23. Pension Accounting and Fair Value 24. Fair Value in IFRS: Issues for Developing Countries and SMEs 25. Fair Value and Financial Instruments 26. Fair Value and IAS 36

Much of the current thinking of accounting standard setters about measurement seems to be based on an idealized view of markets as being complete and in perfectly competitive equilibrium. In such conditions, there is a unique market price based on full information for every asset and liability, and there is an obvious attraction in using this price as the measure for accounting. This explains the apparent enthusiasm for single ideal measurement methods based on market price, such as fair value (FV), defined in SFAS 157 as a market selling price...

Fair Value Measurement after Financial Crunch

ABSTRACT: The Snowy Ridge Ski Resort case study illustrates the use the new Fair Value Measurement Standard (SFAS No. 157) with various assets in connection with the acquisition of a ski resort and subsequent test for impairment. The case study introduces students to the two primary approaches for measuring fair value (Market and Income). These approaches are then used to compute fair value for a variety of assets. In addition, students become familiar with the Fair Value Hierarchy and classify fair value measures in accordance with the hierarchy. The assets to which the fair value measures are generated include: marketable securities; property, plant, and equipment; real estate under development; and goodwill. The fair values and other input data are then used to test for impairment of the operating assets and goodwill. Thus, the case study illustrates the interplay between fair value measurement and impairment testing in a simple setting to give the student a foundation for understanding how fair value measurement is used in GAAP for operating assets.

Fair Value Measurement in Financial Reporting

Property, Plant, and Equipment: The Next Step in U.S. Fair Value Accounting?

Synopsis The research problem This study investigates whether the debt structure of a firm — that is, how a firm organizes its debt contracts — depends on the extent to which fair value measurement is applied to the balance sheet. Motivation Most public firms have a nontrivial percentage of balance sheet items measured at fair value under the mixed attribute accounting, and there is a lack of understanding of its effect on the reporting entity’s debt structure. This study focuses on two aspects of the debt structure that have both practical and theoretical relevance, namely the priority structure and the financial flexibility. A priority structure involves the simultaneous use of different priorities of debt and is common among risky borrowers. Survey results show that financial flexibility is of first-order importance regarding the debt policy of firms. Here, financial flexibility refers to a firm’s ability to pursue new investment opportunities via debt issuance. The test hypotheses The first hypothesis states that a borrower with a higher percentage of balance sheet items measured at fair value is less likely to have a priority structure. The second hypothesis states that a borrower with a higher portion of balance sheet items measured at fair value likely has a debt structure that is more financially flexible. The third hypothesis states that the fair value of liabilities and the fair value of assets are equally relevant to debt structure decisions. Target population This study focuses on nonfinancial firms in North America that are subject to the mixed attribute accounting, which measures a certain percentage of assets and liabilities at fair value. Adopted methodology The main tests use multivariate analysis that includes both logistic regressions and OLS regressions. Additional tests include cross-sectional analyses and the Granger causality test. Analysis Using a sample constructed from Compustat North America and Capital IQ (6,220 firms and 36,487 firm-year observations), the main tests regress dependent variables, namely the priority structure measures and financial flexibility, on the exposure to fair value measurement. Findings Results show that fair value measurement reduces information asymmetry and has favorable effects on the debt structure. A high exposure to fair value measurement reduces the need for a priority structure. A high exposure to fair value measurement also enhances financial flexibility. Additional analyses reveal that the favorable effect mainly comes from assets measured at fair value. The effect becomes weaker with respect to liabilities measured at fair value.

Measuring and reporting liabilities at fair value is part of the FASB's overall project on fair value measurement and reporting. The FASB has taken the position that in measuring and reporting the fair value of a liability, such as a debt financial instrument, the fair value measure should reflect the credit standing of the issuer. Furthermore, changes in fair value, including the effect of changes in the issuer's credit standing, should be reported as gains and losses on the issuer's income statement. Whether liabilities should be reported at fair value and whether the fair value measure should incorporate credit standing and changes in credit standing are controversial issues. The primary controversy centers on the counterintuitive results of an entity's recording of a loss if its credit standing improves or a gain if its credit standing deteriorates. In this paper, we advocate an alternative position. We propose that liabilities be measured and reported using risk-free rates. This proposed approach recognizes the default risk portion of a debt's fair value as a distribution to shareholders when the liability is incurred. Our proposal supports the FASB's position that an entity's cost of borrowing, that is, interest expense on the entity's income statement, should reflect its credit standing and changes in its credit standing. We believe that our approach to accounting for liabilities is a viable alternative that warrants consideration. It avoids counterintuitive results, is consistent with the theories underlying the pricing of debt securities, and is more consistent with a going-concern assumption that an entity is expected to fulfill its debt obligations.

Purpose Consequent on the widespread of fair value (FV) accounting with the coming into effect of International Financial Reporting Standard (IFRS) 13, this study investigated the post-implementation challenges of FV measurement from the perspective of auditors in Nigeria. Design/methodology/approach Data collection was through a structured-questionnaire administered on auditors from diverse audit firm backgrounds in terms of size, international affiliation and global presence. Statistical techniques such as cluster analysis, factor analysis and ANOVA were applied to analyse data obtained from 277 respondents. Findings It was observed that the severest challenge of FV measurement bothers on the paucity of information for valuation of items. The magnitude of the challenges of applying FV measurement in various industry sectors appears similar. Although audit firm attributes affect perception on the challenges, there is concurrence among auditors that manipulation of values of assets/liabilities with no market price during estimation, leveraging on non-availability of market information on assets/liabilities by managers to manipulate financial statements, inappropriateness/non-compliance of valuation methods with IFRS 13, and low level of awareness among preparers of financial reports are notable post-implementation challenges of FV measurement. Practical implications Considering that the adoption of IFRS 13 impliedly places responsibilities on countries applying the standard to develop institutional structures that facilitate the valuation of items using FV measurement, it seems the establishment of such apparatus may be a sine qua non for fully realising the socio-economic benefits of applying FV accounting. Originality/value The study contributes to knowledge by exposing the practical challenges of FV measurement and accounting estimates typical of a developing country that has fully implemented international accounting standards. Moreover, findings from this study could be compared with the result of investigations conducted in other jurisdictions to gain a deeper and wider insight into the challenges of FV measurement with a view to proffering solutions to the post-implementation challenges of IFRS 13.

This study investigates the application of fair value ac- counting in companies in Bosnia and Herzegovina. The study was conducted on a sample of 190 companies. The application of fair value accounting causes a lot of controversy related to the relevance and reliability of fair value information. It is believed that the extent to which fair value measurement is used reflects attitudes of financial statement preparers about the usefulness of this model at its best. The findings of this study sug- gest that most companies in Bosnia and Herzegovina do not have tendency to apply fair value accounting. It is found that half of the companies in the sample do not use fair value accounting at all. Almost half of the com- panies that use fair value accounting use it just because they own assets that require fair value measurement. Fair value accounting is much more used in financial and larger companies than in non-financial and smaller companies. Companies mostly use fair value accounting for the measurement of investment property. However, they use it for the measurement of intangible assets at a minimum. The findings also suggest that the application of fair value accounting increases the uncertainty in fi- nancial statements. The quality of fair value disclosures is very low. Numerous companies do not disclose infor- mation on fair value hierarchy and valuation techniques that were used for fair value measurement. Companies that disclose this information mostly use indirectly ob- servable inputs (Level 2) for fair value measurement and these create a lot of room for earnings management.

The Graeber Companies, Inc. case illustrates the implications of the Fair Value Measurements Standard (FASB ASC 820 or IFRS 13) and the Fair Value Option for Financial Assets and Financial Liabilities (FASB ASC 825 or IAS 39) on the accounting and auditing issues regarding fair value accounting. Based on an actual company's experience, the case provides an application of the new standards on fair value measurement, which is one major achievement of the FASB/IASB convergence project. Graeber Companies, Inc. is a 100-year-old financial boutique firm that, through its wholly owned and partially owned subsidiaries, is engaged in financial service activities. One of Graeber's proprietary investments is an equity investment in Advisor Group, Inc. (AGI)—an early stage development company. Students evaluate AGI's financial performance and strategic activities, including operating losses, issuance of preferred stock and proposed acquisitions by another investor company relative to its materiality, and potential impairment of Graeber Companies' equity-owned investment. The case study requires a determination of materiality of the equity investment and introduces students to the different valuation techniques such as Discounted Cash Flow Analysis, Public Market Analysis, Precedent Transaction Analysis, and the waterfall schedule method. The usefulness of these methods is then analyzed in determining the fair value of an investment in the situation where there have been no recent market transactions. Through analysis of the financial statements, relevant footnotes, and obtaining/obtained fair market value using different valuation approaches, students make a recommendation on materiality and on the fairness of the Graeber Companies management conclusion that no impairment of its investment in Advisor Group has taken place.