A Subset of Fair Value - Essay Example

AASB 116 , later replaced with AASB 1041, defines Market Value as a subset of Fair Value, where Fair Value is" the amount for which an asset could beexchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction" (Australian Prudential Regulation Authority). The same act stipulates that Fair Value is to be determined as follows: "1. The quoted market price in an active and liquid market (i.e. market value); or 2. when there is infrequent activity in a market, the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available- an estimate of a price for the asset or liability in an active or liquid market." (Australian Prudential Regulation Authority) AASB (short for The Australian Accounting Standards) indicates that transaction costs are to be ignored when establishing the market value, mainly for "the purposes of the forms". Thus, the AASB framework provides the general guidelines, establishing the way a company should measure all its assets. The aim of the act is to avoid inconsistency of the various methods of measuring fair value, providing a more rigorous framework, for all companies. Thus, the market value of any current asset will be measured by the replacement cost of the services or benefits currently embodied in the asset. One very disputed and problematic point concerned the market value of different assets that weren't commonly traded on the open market, such as buildings or other possessions of this nature. The conclusion reached by the AASB researchers and specialists was that the best way to measure the market value of such assets would be by comparing the selling-prices of other buildings in the area. Although controversial at first, this rule was, seemingly, the best one to follow in establishing the potential selling price of any asset held by a company. The concepts of "current assets" and "current liabilities" are also defined by AASB, as being "an asset that is expected to mature or be realized within a 12 month period", while current liabilities are those liabilities that are "expected to be paid, settled or extinguished within a period equal to or less than 12 months from the reporting date". FASB and IASB board members met on 12th of May, 2006 to discuss and establish the revenue recognition methods that should be used. In doing so, there were some factors that had to be acknowledged as important to the recognition of any revenue. First on the list was customer acceptance, which lead, after thorough examination and in-depth discussions, to the conclusion that: "Revenue shall be recognized if the customer must accept performance to date. That is, the contract's legal remedy for breach is, or is like, specific performance or in the event of customer cancellation, the customer is obligated to pay damages reflecting performance to date." (see http://www.fasb.org/board_meeting_minutes/04-27-06_rr.pdf) "We're hoping that there will be more consistency in the way companies approach fair value measurement, and less diversity in practice from the user's perspective. Users should have more confidence that when they look at those disclosures about what is being shown at fair value and the methods used, they'll have better information to use to assess the quality of earnings and how they view the reliability of the estimates being made.", stated FASB board member, Leslie F. Seidman (Glenn Cheney, "FASB standard clarifies fair value measurement", 16 Oct, 2006,). From this point of view, the AASB framework provides rigorous guidelines, avoiding misunderstanding and inconsistency. Still, as all regulations were changed and revised, many companies complain that they have a difficult time in applying them, and that many criteria provided by this statement have been so frequently changed and discussed that the danger of misinterpreting or failing to respect the newest changes is real and impossible to ignore. Given the fact that the market value is mainly based on assumptions that market participants would make, and not necessarily only the company that might buy or sell the asset, the new AASB guidelines allow companies to enhance their market value. Of course, this is not the only way in which the reporting entities are affected by the regulations provided in the statement. Regarded from another point of view, the use of market values will enable the potential investors but also other persons reading the financial statements to be more informed about the company's financial performance, and consequently more informed decisions are more likely to occur. These standardized criteria give the investors the possibility to have a better look at the company's marketing techniques, as measuring assets also implies a detailed report on the techniques used to get those specific assets. In establishing the fair market value, the information used has to be prioritized. Thus, an information hierarchy matter arises. The difference between the assets and liabilities that could be easily sold or traded on an open market and the assets and liabilities that are not actively traded arose numerous discussions. Consequently, AASB has settled a hierarchical scale in the measurement of such vales, as to avoid misunderstandings and disputes. Another disputed notion that was included in the AASB framework regarded the unobservable assets, or, in other words, those assets (or, in that regard, liabilities) which have little or even no activity at the date of the measurement. The board has reached the conclusion that such assets aren't necessarily the object of any evaluation; even so, it is stipulated that if assumptions can be made with reasonable effort and cost, than the company is obliged to include them in the report. AASB 101, "Presentation of Financial Statements "document clearly states the area of impact of the Standard. According to the above mentioned document, "the impact is restricted generally to the resources required to make the system changes necessary to implement changes such as formats, classifications and disclosures", and consequently no financial impact should be felt by Australian companies, other than at the level of "classification criteria that may impact on ratio analyses". (AASB 101 "Presentation of Financial Statements") Sources/ references list: -AASB 101 "Presentation of Financial Statements" Web Summary -the Australian Prudential Regulation Authority web site, glossary of terms (http://www.apra.gov.au/General/MDOFormsInstructions/Glossary%20of%20Terms.pdf ) -Financial Accounting Standards Board meeting transcript - (http://www.fasb.org/board_meeting_minutes/04-27-06_rr.pdf) -Glenn Cheney, "FASB standard clarifies fair value measurement" , 16 Oct, 2006, (http://www.webcpa.com/article.cfmarticleid=22175&pg=newsarticles&page=1) - Tammy Whitehouse , "Fair-Value Puzzle Finally Answered" September 26, 2006 (http://www.paradigmshiftpr.com/fairvalue.htm) Read More