“From the accountants’ perspective, what does ‘true and fair’ mean? In your opinion, is the true and fair requirements useful, or necessary?”
Accounting is the measurement procedure and communication of financial information (Needles and Powers 2013) that allows companies to report on the economic performance of their business. It is these reports which bring the concept of ‘true and fair’ into play. True and fair is a central concept related with the use of Financial Reporting Standards and the conceptual framework in keeping financial reports standardized and reliable for the users, namely shareholders and investors (Waqas 2013). Fair value accounting as viewed by a large percentage of specialists and academics has been considered a ‘revolutionary approach’ to support shareholders throughout the decision making process as it represents the current market value of an economic asset or liability (Kaya 2013). Although some have applauded the power of true and fair value, contenders have highlighted the substantial absence of consistency, thus valuing historical cost as a complete structure built of solid foundations.
‘True’ relates to the reliability and the consistency of information enclosed within financial reports. The truthfulness indicates that all the figures and numbers quoted are precise or close to being accurate based upon the financial reporter’s understanding of the situation (Miller & Bahnson 2007). Numbers are generally rounded to make the reporting of the financial positions uncomplicated, yet these numbers must be by and largely spot-on. They do not solely include cash transactions but also the value of assets (REFERNCE).
According to the International Financial Reporting Standard (IFRS) 13 ‘fair value’ is def...
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The hierarchy of fair value consists of three level, and level one is considered as the highest level. Level one is Price traded that are unmodified within the active markets for assets or liabilities which correspond to the entity so that the Commission could find them at the measurement date. The second level is an inputs with different prices from included in the first level one, where they are through which assets and liabilities are monitoring a straightforward manner and are (prices) or indirectly and is (derivatives prices). The third level is the unobservable inputs for the asset or
Australian bookkeeping gauges are set by the Australian Accounting Standards Board (AASB) and have the power of law for Corporations law elements under s 296 of the Corporations Act 2001. They should likewise be connected to all other universally useful monetary reports of reporting elements in general society and private parts.Australian Accounting standards board oversee process of accouting standards if all companies registerd with ASIC complying with these standards and their financial reports are maintend with standards to keep public share holders money in safe hand in past many auditors companies used to ignore accounting standards to give companies actual financial figuers lower or higher to keep their shares prices or investors intact this lead to so many financial crises and collapse of comapanies.The case analyses the high standards required by the accounting profession in line with the requirements of the Australian Standards Board prescription. Further, the case is analyzed technically in line with the accounting standards prescribed by the institute. Here, an employee accountant of a company is asked to iron out the
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
According to CSU-Global (2016), fair value is defined to be the price that would be received to sell an asset or the amount that must be paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, there are advantages and disadvantages of fair value, and the three-level hierarchies play the main role in fair value. According to Whittington and Pany (2014), level I is about inputs of observable quoted prices in active markets for identical assets or liabilities, level II is inputs of other observable quoted prices, general for similar assets or liabilities in active markets, and level III is inputs that are unobservable for the assets or liabilities. The hierarchy gives the highest priority or more advantage to quoted prices in active market, level I, and lowest priority or the least advantage to unobservable data, level III. Therefore, the company management must appropriately categorize fair value measurement within the hierarchy and record any disclosures relating to fair value in the notes of the financial statement. According to Shelly (2014), one major advantage of fair value is that it is a clear concept; when the value of an asset goes up the company makes an adjustment of the
Hines, R. D. (1991). The FASB’s conceptual framework, financial accounting and the maintenance of the social world. Accounting organizations and society, 16(4), 313-331.
Fair value is the market value at which an asset can be sold or bought. Ryan (2008) highlights many criticisms regarding fair value accounting, these include the reported losses being misleading because when markets return to normal the losses will reverse. When a company revaluates assets or liabilities at a time when the market condition is bad, the value of the assets and liabilities begin to 'swing '. However, once the market stabilises, assets and liabilities will be revalued at their original levels. This makes reports of gains and losses temporary which can be misleading to potential investors (Penman, 2007). Fair values being unreliable as they are difficult to estimate especially if the market is illiquid. And reported losses producing further losses which increases the overall risk of the financial system. For example, if the current market price for an asset drops and thus revaluing the asset downward, people might begin buying this asset at even more lower prices (Benston,
In conclusion, according to IFRS 13 one can say that fair value measurement is one of the accurate accounting measurements. There is some other measurement is also available but fair value measurement is trust worthy and according to international standards. As this essay include three example which are from different kind of industries like infrastructure and environment services company, investment company and manufacturer. We can say that this in widely used measurement.
A qualified financial statement contains fair representations of an organization 's financial result, condition, and cash flow which is structured to ensure the organization is in compliance with GAAP . In the standard format, an organization should follow accounting principles to comply with internal accounting systems, disclosure rules, auditor oversight, and ethics, in the event, the above-mentioned principle does not meet, an audit failure may occur. An auditor failure may result as the request of clients and senior partners did not stand firm to refuse an unethical request from the clients. I will discuss a case of audit failure due to incompliance in the internal accounting system 's disclosure rule and firms ' right to refuse risky clients
Financial reporting quality is related to the overall quality of the financial statements including disclosures which depict the fair presentation of the firm. Whereas in low financial reporting quality accounting figures are distorted or changed in such a way that their economic underlying reality is not correctly exhibited. For instance if the depreciable life of an asset is estimated in such a way which contradicts with its real economic life then it can be said that financial reporting quality is affected. In many cases there are alternatives available in the accounting standards or estimation and judgment is involved of the management. However, management can exploit these alternatives or judgments to change figures according to their desired outcome. For instance if management want to show lower earnings they can choose alternatives between inventory valuation methods (LIFO in case of rising prices) or lower depreciable lives. Management is usually in a position to manipulate figures because they are the ones who are responsible for preparing financial statements. American ...
The move towards fair-value accounting should be continued for many reasons. When comparing fair value, or market value, to historical cost, fair value gives a more relevant and updated view of what a particular asset or liability is truly worth. This promotes transparency of a company’s operations and gives stakeholders and potential investors an accurate look at the company’s worth. If assets and liabilities are sitting on the company’s books at historical value, this information can quickly become out-of-date. Fair value method of accounting also limits a company’s ability to lie about their income and make it look better than it actually is by using gains or losses from sales to increase or decrease net income. Since gains or losses
Judgement is a notion of relevance and reliability in developing and applying accounting policies. It is a requirement of management that they exercise a high degree of professional judgement when selecting appropriate accounting policies in the preparation of financial statements that is relevant to decision-making and assessment needs of users. Management should also consider the applicability of IFRS and AASB in dealing with similar and related issues and then the definitions, recognition criteria in the Conceptual Framework when there is no IFRS standard or interpretation in certain circumstances that are specifically applicable. Management may also consider the most current pronouncements of other standard-setting bodies to the extent that do not conflict with IFRS and AASB in developing accounting standards and accepted industry practices by using a similar conceptual framework.
On the other hand, fair value accounting raises the concerns of reliability. The estimation of fair value tends to be subjective since because “many assets and liabilities do not have an active markets, therefore the valuations are less reliable” (Bies, 2005). It is reliable only if markets for assets and liabilities are liquid and transparent. Even though fair value accounting has its own importance in term of measurement, the perspective of historical cost should be taken into account. As fair value reflects the current market conditions, an asset for example should have been valued at $50,000 may suddenly fall to $30,000 due to the economic downturn. It results a loss of $20,000 in net income since historical perspective was ignored. Also,
Financial Reporting Council. International Standard on Auditing (UK and Ireland) 700. 01 June 2013. 17 November 2013 .
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