Fair Value Method Research Articles

The effect of accounting methods on financial reporting quality

PurposeThis study aims to examine the relationship between accounting measurement method of biological asset and financial reporting quality. Specifically, this study examines whether using fair value method or the historical cost method on biological asset provides different financial reporting quality.Design/methodology/approachThis study uses data from 38 agricultural companies that are members of the Roundtable on Sustainable Palm Oil. The annual reports of 38 companies from the Palm Oil Growers over a five-year period starting from 2011 to 2014 are analysed.FindingsThis study shows that companies using historical cost measurement produce less reliable and less relevant information compared to the companies that are using fair value measurement.Research limitations/implicationsThe results in this study imply that the use of fair value measurement improves the quality of financial information.Practical implicationsThis study supports IASB’s justification of developing IAS 41 as the principle-based standard that better represents the financial information related to biological asset and subsequently lead to good accountability and harmonisation practices.Originality/valueThis study provides evidence on the best measurement to be used in agriculture activities using a larger sample size of few countries. In addition, this study contributes to the existing literature on the effect of accounting methods on financial reporting quality.

Accounting Choice under IFRS: The Role of Accounting Tradition and Managerial Opportunism

The present study investigates the role of accounting tradition and managerial opportunism when companies are given by IFRS the option to choose whether to book accounting items following the historical cost or the fair value method. We hypothesize that accounting tradition still plays a role in the choice, with Continental European companies preferring the historical cost and the Anglo-Saxon companies choosing more often the fair value. We also hypothesize that managers will act opportunistically, choosing the historical cost or the fair value method in order to influence the performance of the company and/or their remuneration. By using a hand-collected sample of 480 companies belonging to Continental Europe (Italy, Germany and France) and Anglo-Saxon countries (United Kingdom and Australia) we find support for the first hypothesis while we reject the second hypothesis. Accounting tradition does still play a role in the accounting choice, while managerial opportunism does not.

Historical cost vs fair value in forest accounting: the case of Lithuania

The accounting methods based on two concepts-accounting at historical cost and accounting at fair value-are responsible for the provision of information about the enterprise's assets in the financial statements. Taking into consideration the specifics of the national financial accounting regulation, the forests managed by the forestry enterprises can also be measured by using either of these two accounting methods. However, in terms of accounting, both of them pose certain problems or ambiguity. The purpose of the research is to evaluate the strengths and weaknesses of forest accounting methods based on fair value and historical cost and the practice of their use in Lithuanian forestry enterprises. The study examines scholarly literature and deploys the theoretical methods of comparative analysis, critical evaluation, systematisation, generalisation. The empirical research involved document content analysis, questionnaire survey. The article deals with the issues of the use of accounting methods for forestry accounting: traditional cost-based accounting methods do not reflect the biological forest transformation, hinders identifying the forest development costs and the end of their capitalisation, the method of a systematic derecognition. On the other hand, the essential complication of the use of the fair value method is that the forest largely lacks an active market with quoted prices. Thus, its fair value is determined on the basis of rather subjective assumptions by means of diverse valuation methods, resulting in unreliable and unverifiable information. The results of the research carried out into the forestry accounting policy observed in the Lithuania's private forestry enterprises revealed that forest accounting by cost is exclusively carried out by all the enterprises under investigation. Nevertheless, the method itself was interpreted quite differently. The article presents the modified forestry accounting methods by cost, which allow reducing the identified shortcomings.

Analisis Penerapan Sak Etap Dalam Penyusunan Laporan Keuangan Koperasi ( Studi Kasus Pada KOPKAR PDAM Tirta Sanita )

The purpose of this study is to analyze the application of IFRSs in the preparation of financial statements ETAP cooperatives, especially Cooperative Tirta Sanita. Analysis is performed to determine whether the financial statements have been applied by the Cooperatives is in accordance with GAAP ETAP set since July 2010. The analysis conducted in this study uses a descriptive method while selected data sources are secondary data from financial statements. The selected data collection procedures are obtained form library research, literatures, records, field research and interviews. The results showed that the Cooperative Tirta Sanita has been making adjustments in applying SAK ETAP in the preparation of its financial statements, but still not all the adjustments in the SAK ETAP have been applied in the preparation of its financial statements. This is evident with the availability of financial statements consisting of a balance sheet, profit/loss, change in equity, and cash flow statement. Cooperative Tirta Sanita using SAK ETAP with reporting guidelines still largely the same as before adopting IFRS GAAP General, therefor not too many significant changes occured. In other words, there was no significant effect happens on the application of GAAP in the financial statements Cooperative ETAP Tirta Sanita. Thus, financial statement reporting guidelines Cooperative Tirta Sanita with SAK ETAP is still using the principles of the historical cost method uses a different cost with SFAS General that is currently adopting IFRS using the fair value method. In general, this is the fundamental difference for the implementation of SAK ETAP.

FAIR VALUE OF NON-CURRENT ASSETS AND THE SECOND LARGEST OWNERSHIP ON AUDIT FEE

The use of fair value method has positive and negative impact. The positive impact of applying the fair value method is more relevant for the decision maker and shows the economic value according to the circumstances at that time. While its negative impact, can lead to manipulation and uncertainty. It takes greater effort for the auditor to assess fairness of fair non-current asset quality, resulting in increased audit fees. This study aims to determine the effect of fair value of non-current asset on the determination of audit fees and to know the multiple large shareholder moderation in the relationship between fair value of non-current asset and audit fee. Using the OLS regression, this study uses companies listed on the IDX from 2013 to 2015 with the exception of the financial sector. The result of this research indicates that fair value of non-current asset influences audit fee and this research shows that the second largest ownership can weaken the effect of fair value of non-current asset toward audit fees.

ANALISIS PERLAKUAN AKUNTANSI AKTIVITAS AGRIKULTUR PADA PERUSAHAAN SEKTOR PERKEBUNAN YANG TERDAPTAR DI BEI MENJELANG PENERAPAN PSAK 69

This study aims to determine the implementation of PSAK 69 Agriculture (2015) on the financial statements of plantation industry companies in the period of 2017 in the year where it has been recommended early implementation before effective on January 1, 2018. Research sample consists of 8 (eight) registered plantation companies in Indonesia Stock Exchange 2017 obtained by using purposive sampling. This study uses descriptive comparative analysis that is by comparing statements that exist in PSAK 69 with its application in the financial statements.The results of this study indicate that 87.5% or 7 (seven) companies have not applied PSAK 69 Agiriculture, because the average level of application of PSAK 69 in the financial statements of these seven companies only reached 57%. Almost all of these plantation companies have not used the fair value method to measure the biological assets of their plantation crops in the 2017 financial statements. Keywords: PSAK 69, IAS 41, Biological Assets, Agricultural Products, Fair Value

USING THE FAIR VALUE METHOD IN THE ASSESSMENT OF BIOLOGICAL ASSETS IN ORDER TO INCREASE THE EFFICIENCY AIND EFFECTIVENESS OF THE FINAINCIAL STATEMENTS

Although accounting thinking has now stabilized on the importance of measuring assets at historical cost as an input to accounting disclosure, the shift to the measurement of biological assets on a cost basis The biological assets are of relative importance in the economic development of the country. The biological assets are influenced by the natural factors of atmospheric and genetic factors as well as the use of chemicals and injury The aim of the research is to try to achieve the use of the fair value method in valuing biological assets. The importance of research is to use the fair value method to evaluate biological assets to increase the efficiency and effectiveness of the financial statements. The most important results reached by the researcher are: There is a relationship between valuation of biological assets in the fair value and efficiency of the financial statements, where the value of T 25.32, a function at a level of significance less than 0.01 and that the confidence limits fall between 4.05 and 4.16. There was a relationship between valuation of biological assets in the fair value method and the effectiveness of the financial statements, with a value of 39.23, a function at a level of significance less than 0.01 and a confidence interval of 4.31 to 4.41 The study recommends: Accounting measurement of biological assets at fair value to reflect the actual results of the assets in their true values to achieve the financial efficiency of the financial statements. The orientation of agricultural companies that manage biological assets through them to disseminate their financial information and disclose their biological activity to achieve the effectiveness and objectives of the administration. The interest of agricultural companies in applying the fair value method of biological assets to show the effectiveness of management to achieve the objective of providing the real information of the financial statements.

МЕТОДОЛОГІЧНІ ТА ОРГАНІЗАЦІЙНІ ЗАСАДИ ОЦІНКИ ФІНАНСОВИХ ІНСТРУМЕНТІВ СУБ’ЄКТА ГОСПОДАРЮВАННЯ

Peculiarities of accounting for transactions in derivative financial instruments are due to the risks inherent in such objects of accounting, in particular in terms of uncertainty about their fair value in the future. Improving the methods and forms of regulation of derivative financial instruments through the mechanisms of accounting methodology determine the need to find opportunities to improve the methodological and organizational principles of accounting in terms of valuation of derivatives, taking into account the practice of IFRS to achieve reliability of financial statements. Difficulties in reconciling UAS with IFRS on the valuation of derivative financial instruments (historical or fair value) are due to the application in regulations of different approaches to the formation of financial statements. It is proved that the use of the historical cost method for valuation of financial instruments is inappropriate, as their contractual nature is manifested in the ability to carry out indefinitely transactions that do not lead to cash settlements, but increase the financial risks of the enterprise. The application of the fair value method for the valuation of derivative financial instruments sets out special requirements for the organization of the valuation process of financial instruments in order to ensure the further choice of sources of financing and financial risk management. The list of elements of the accounting policy which should be provided in the administrative document on the accounting policy of the enterprise which cover methodical and organizational receptions of the account is defined. The classification of financial instruments is defined as the basis for the choice of accounting policy methods. The minimization of potential risks of losses due to the use of incorrect valuation of financial instruments should be facilitated by appropriate verification based on the comparison of valuation results based on independently obtained prices with the results provided as a result of valuation procedures. It is proved that the audit should cover liquid financial instruments, as well as those instruments that do not have market prices, which will facilitate further decisions on the adjustment of valuation models and methods.

Valuation Models for Low-Income Housing: How Does Income Approach Reduce Ambiguity of Assessing Property Tax?

Property tax valuation and assessment for low-income housing remain a challenge for real estate assessors, developers, property managers, and local governments. This paper reported the research findings on the use of valuation methods for real estate tax abatement in low-income properties gathered from real data. Based on data from income statements and balance sheets of client’s properties, valuation models for low-income housing versus market-price housing were proposed and the major variances were compared. From the examination of the major valuation methods used by states and localities, evidence was found to explain: 1) How the fair market value method failed to apply to the tax assessment in Massachusetts that requires a market-price value for property assessment purpose, and 2) why the income approach is preferred in the asset valuation of low-income housing. The findings showed the effectiveness of income approach in the absence of statutory mandates in the State of Massachusetts where a disparate body of case law is used. The paper shined light on valuing real estate encumbered with restrictions for assessment purposes, especially for properties vulnerable to changes in property taxes. It further suggested the need for a legislative resolution for clarity and consistency in valuation of low income housing.

A Fracking Mess: Just Compensation for Regulatory Takings of Oil and Gas Property Rights

As the Trump administration tries to roll back federal regulations on the oil and gas industry, constituents depend on state and local governments for protection from the worst impacts of industrial-scale fracking. Yet as the debate about proper regulation of the oil and gas industry continues, the specter of potential takings liability looms over the public discourse. Such liability is premised on the idea that government regulation of fracking might constitute a taking of private property that requires payment of just compensation — that is, the amount of money that should be paid to owners if indeed there is a taking. I have previously defined this type of claim as “fracking-takings.” These claims are unlikely to succeed for a variety of reasons, but the potentially large and uncertain liability on government calls for considered analysis of how fracking-takings claims would be valued. This Article aims to fill a gap in the existing literature by using the example of fracking-takings to examine the valuation framework for regulatory takings claims. No detailed treatment of this topic exists outside the context of land valuation. Just as in other areas, the rapid technological development that has enabled the recent fracking boom provides a useful opportunity to examine the law of just compensation. This Article advances two key points regarding just compensation for fracking-takings claims. First, the standard valuation method of fair market value presents difficult, perhaps impossible problems of evidence. This makes valuing fracking-takings claims highly uncertain, which undercuts the efficiency goal of just compensation. Second, even putting aside those evidentiary hurdles, equating the fair market value of taken property with just compensation in the fracking-takings context would frustrate the fairness goal underpinning takings law by risking a windfall for the property owner at public expense and shifting the risks of oil and gas development to the government. Thus, courts should avoid an all-or-nothing approach and carefully calibrate just compensation based on the facts of each case. Moreover, government regulators should not fear takings liability, since threatened liability would violate the theoretical framework underpinning just compensation law and therefore is unlikely to be unduly burdensome.

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This study examines earnings quality and the effects of Corporate Governance (CG) towards earnings quality in Islamic and Conventional Banks. Earnings quality in this study analyzed by investigating earnings volatility that affect the predictability of earnings and by detecting income smoothing using loan loss provision. Bank’s earnings volatility predicted to increase because the financial instruments are reported using fair value method after PSAK 50/55 revision. Previous studies report that bank’s manager use their accrual discretion to manage earnings volatility by smooth their income. Using samples of Islamic and conventional banks from period 2007-2014 and pooled least square method, this study finds that earnings volatility only significant in conventional banks’s acccrual discretion. Earnings volatility has no effect on Islamic banks’s accrual discretion. However, the income smoothing is significant in Islamic and conventional banks. CG mechanism which is measured using self-assessment scores proven to weaken the income smoothing on both banks. This study also finds that difference in CG self-assessment mean value score is significant on both banks.

Dim Sum Bonds at Renault S.A

This case explores the accounting for long-term debt from the perspective of the issuer of bonds payable.The global setting involving France-based Renault issuing Chinese yuan-denominated debt in the offshore markets (i.e., “dim sum bonds”) provides significant opportunity for secondary learning. The accounting could be undertaken from the perspective of U.S. GAAP or IFRS (i.e., the standards are identical for the principal transaction and events considered in this case, with the exception of hypothetical discussions related to the fair value option for debt available under SFAS 157 in U.S. GAAP).The case requires students to account for the issuance of bonds offered at a discount, to implement the effective interest method for several periods, to calculate the amount of interest expense that will be charged to the income statement over the life of the discounted bonds (i.e., to understand the economic rationale behind the prescribed effective interest rate method), to understand the income statement implications of early debt extinguishments and the transaction entries associated with these transactions, and to consider the implications of the fair value method had the issuer made this election. Excerpt UVA-C-2373 Apr. 13, 2016 Dim Sum Bonds at Renault S.A. Under the leadership of turnaround kingpin Carlos Ghosn, and through its partnership with Nissan, France-based Renault became the fourth-largest carmaker in the world. While part of Renault's growth strategy had been to expand into emerging markets, it was also a front-runner in the all-electric vehicle (EV) market and had plans to capture even more. Both strategies included building up business in China. In 2013, Renault closed on a 50-50 joint venture with Dongfeng Motors that introduced the Dongfeng Renault Automotive Company (DRAC). As part of that deal, Renault announced it would be producing vehicles locally in Wuhan, China, by 2016. It planned to open a new plant capable of manufacturing 150,000 vehicles a year. The factory opened on February 1, 2016. Partnering with Dongfeng placed Renault front, right, and center of the demand for EVs in China. The Chinese government had mandated the purchase of EVs in an effort to reduce pollution problems. Ghosn announced that Renault was discussing its plans with Chinese officials to build one of its electric car models in China. . . .

Is the Harmonization of the Accounting Law in the EU Feasable?

European Directives, from the Fourth Directive to Directive 2013/34/EU, tried to tear the Accounting’s Tower of Babel down more than once. The present essay, after considering the gradual evolution of EU regulation towards harmonization in the field, will explain: (i) the significant effects of fair value and valuation methods which are alternative to the historical cost one, and (ii) the problems arising from the interaction between fair value accounting and creditors’ protection. Then, it will address the options available in order to concretely abolish accounting borders, as reducing the variations amongst companies located in different Member States and amongst companies preparing financial statements in accordance with the IAS/IFRS principles or national rules.

Judgment of the Relevance of Fair Value in Biological Assets: A Experimental Analysis on the Market Perception Versus the Academic Perception

The usage of the fair value for the evaluation of biological assets arising from the adoption of international accounting standards have caused significant economic effects on the value of the companies and, hence, on their current and future results. Furthermore, there is a number of criticisms - from both the academic and business environments - about the importance and usage of such evaluation metrics, especially for assets related to agricultural products which do not have an active trading market, for instance: eucalyptus forests. Thus, the present study aimed to analyze if the users of the accounting information acknowledge the importance of using the fair value method to measure the biological assets. To analyze the issue, this study conducted an experiment with 217 market professionals attending the Executive MBA course and 155 students from the Graduation Course in Accounting, from the perspective of the Counterfactual Thinking Theory. The following stimuli about the judgment of the relevance of fair value in biological assets were considered: (i) if the result (losses or gains) arising from the evaluation at fair value, (ii) if the type of biological asset (with or without liquidity) and (iii) if the managerial decision (hold the asset to the maturity date or make it available for sale) interfere in the judgment of the relevance of fair value. The findings reveal that the use of fair value is relevant for the measurement of the biological assets, in opposition to the use of the Historical cost. I has also been found that the fair value is more important for the assets without active market (eucalyptus) than for the assets with net market (bovines). Thereby, the findings of the research adhere to the guidelines of the List of International Financial Reporting Standards recommending the adoption of the fair value as a measurement methodology for such assets (eucalyptus and bovines), although there is still some concern with the reliability of the measurement approach (fair value).

The reverse side effects of mark to market accounting: Exista and the saga of leveraged paper profits

We describe holding companies and their main roles. We follow up by describing the spectacular development of the investment company, Exista. We then discuss how the difference in fair value methods and equity methods may provide a false picture of the state of companies. This applies especially to different types of holding companies. Our paper shows an example of one that people generally perceived as being a financial company when in reality was more like an investment company, in this case a highly risky and leveraged one.

The reverse side effects of mark to market accounting: Exista and the saga of leveraged paper profits

We describe holding companies and their main roles. We follow up by describing the spectacular development of the investment company, Exista. We then discuss how the difference in fair value methods and equity methods may provide a false picture of the state of companies. This applies especially to different types of holding companies. Our paper shows an example of one that people generally perceived as being a financial company when in reality was more like an investment company, in this case a highly risky and leveraged one.

Accounting for property investment: an examination of the value relevance of unrealised gains and losses recognised under IAS 40

The main objective of this study is to examine the relevance of fair value accounting for investment property permitted under IAS 40. This will be achieved by examining the value relevance of unrealised gains and losses reported in the income statement in explaining stock prices for real estate companies listed in Kuwait stock exchange. The study examines further the impact of unrealised gains and losses on the incremental explanatory power of earnings and compares the explanatory power of book value of equity to that of earnings. The results indicate that unrealised gains and losses recognised under IAS 40 have no incremental information content over net income before unrealised gains and losses and that the inclusion of unrealised gains and losses in income numbers decreases the explanatory power of the valuation model and decreases the incremental explanatory power of earnings relative to that of book value. The results indicate further that the incremental explanatory power of earnings exceeds the incremental explanatory power of the book value of equity when unrealised gains and losses are excluded from the earnings measure. These results question the fair value method permitted under IAS 40.

Accounting for Biological Assets and the Cost of Debt

ABSTRACTFirms engaged in agriculture generate revenue from biological assets that manifest in the cultivation of bearer fruits and nuts, the tilling of crops, and the production of livestock and forestry. We investigate whether firms' cost of debt is associated with the measurement method they use to account for their biological assets. We find that the cost of debt is higher for firms using the fair value method of accounting for their biological assets relative to firms using historical cost. However, the positive association between the cost of debt and fair value is driven by firms that transform bearer plants, i.e., living plants that ultimately bear produce for more than one year. We also document that fair value combined with auditor attested IFRS use results in a lower cost of debt for firms transforming other types of biological assets. Our cross-country study focuses on a class of assets previously unexplored, and contributes to the literature that examines the consequences of fair value accounting for financial statement users.JEL Classifications: G39; H25; M41.

Fair value accounting choice

Purpose– Profiting from a unique research opportunity in the Portuguese REIFs market, this paper aims to investigate the impact of fund managers ' accounting choice on funds ' returns distribution and analyses the relationship between fair value accounting choice and conditional accounting conservatism.Design/methodology/approach– According to Portuguese securities market regulation, fund managers of REIFs can fix the value of the fund properties between the acquisition cost and the average of the appraisal values assigned periodically by two independent appraisers. Therefore, through the analysis of fund managers’ actual choice to value REIF net asset value in comparison with a mandatory adoption of a pure fair value method (appraisers’ valuations), the paper investigates the impact of accounting choice on funds’ return series. On the other hand, an analysis at fund level is also conducted to determine the consequences of fair value accounting choice on the ability of fund managers in delaying the recognition of asset value decreases (bad news).Findings– Results indicate that in the period of financial crisis, significant differences in REIF returns according to the accounting method used to value properties are observed. There is also evidence that fund managers of open-end funds that are subject to greater market pressure to meet financial reporting objectives are more likely to smooth book value returns. Additionally, findings support the hypothesis that REIFs that use a more historical cost accounting model exhibit a lower degree of conditional accounting conservatism, suggesting that the use of fair value may be useful to reduce fund manager discretion in delaying the recognition of losses.Originality/value– This paper provides an empirical evidence of one possible positive effect of the use of fair value on the quality of financial reporting, evidencing how a more fair value accounting model may limit fund managers’ discretion.

Comparability of Accounting Choices in Future Valuation of Investment Properties: An Analysis of Brazilian and Portuguese Listed Companies

<p>One of the main purposes for adopting the International Financial Reporting Standards (IFRS) is the quest for comparability between financial statements within the same country, over time, and between different countries. IFRS have the feature of allowing accounting choices in most of their standards. However, the existence of such flexibility in the process for recognizing, measuring, and disclosing as sets and liabilities may impact on comparability. IFRS have been criticized both due to their accounting choices and the adoption of the fair value paradigm. This article examines these two issues, investigating the choice of the cost model versus the choice of the fair value model for investment properties (IPs), an option guaranteed under the terms of the International Accounting Standard (IAS) 40. This research aimed to identify the comparability degree and the factors that determine the accounting choices made by managers of IPs, in Brazilian and Portuguese listed companies, within the periods from 2010 to 2012. Comparability, within and between countries, was identified by the T-index and the search for the determining factors of accounting choices made by managers was performed by means of a logistic re gression analysis. As a result, it was found that, despite the accounting choices allowed by IAS 40, there was a mean comparability between the accounting practices of firms in these countries, but showing a decrease in the index over the years. The explanatory factors identified were auditing by one of the big four (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG, or Ernst & Young), companies' indeb tedness, relative importance of IPs' balance, net profit, and less experience of Brazil in using the fair value method to appraise IPs.</p>