...defined the fair value of an asset as the price that would be received by the holder of that asset in an orderly transaction. On September 30, 2008, SEC and FASB issued a joint clarification which stressed that fair market value is not the price that would be received in distressed sale or forced liquidation. They also provide guidance that estimates of fair value can be made using the expected cash flow of such assets, provided the estimates has also reflects the adjustment of a willing buyer in the risk of default. This concept created transparency on the value of the assets which was easily confirmed by the auditors and users of the financial statements. However, during the recent economic crisis, this concept has created havoc on the balance sheets of some major financial companies. These financial companies were forced to write down assets in which the market has dried up and made it hard for them to value these financial assets. Since these financial assets were also used as a requirement for the liquidity ratio of some financial institutions, the write down of these financial assets caused the ratio to fall and trigger some margin calls. Many financial institutions decided to horde cash in order to preserve their ratio which caused the credit market to dry up. Most bankers argued the requirement of fair value accounting unfairly punished financial companies and caused their ratio to fall. Thus, they were lobbying the governments to ease up on fair value accounting...
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...even though some of them were not fair. Hammurabi was alive in the 18th century B.C., this is when he established his code. He ruled Babylonia for 40 years. Was Hammurabi’s laws fair? Hammurabi's laws were unfair because he manipulated his people, he wasn’t open to any change in his laws, and lastly he treated his people unjustly. Hammurabi manipulated his people into think that his laws came directly from Shamash. For example Doc A says, Shamash is a god. Hammurabi says that Shamash advised him in a meeting with the laws. But there is no evidence to prove this meeting really happened. So he could’ve lied to his people by convincing him the god Shamash told him these laws so that his people would follow these rules. From Doc B, it quotes Hammurabi taking props of the rules that he said the god Shamash came up with. Which this shows that he lied to his people. He lied because before he said it was the god's rules...
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...Major Case Study Cendant Corporation 1 Briefly summarize the accounting techniques used by Cadent to manipulate financial results. Categorize each technique into one of Schilit’s financial shenanigans. Cendant used aggressive accounting to shift current marketing expenses to a later period by capitalizing the cost; this is shenanigan number 4. Cendant also swift future expenses to the current period and later released reserves into income. When Cendant made acquisition, it took large restricting charges to create bogus income; this is shenanigan number 7. In subsequent period, Cendant released these reserves into income; which is shenanigan number 5. 2 Describe the failing of EY with respect to conducting an audit in accordance with GAAS. Include in your discussion any violations of the AICPA Code of Professional Conduct. The EY auditors provided accounting advice as well as audit services to CUC and Cendant in connection with the establishment and use of restructuring reserves. The auditors excessively relied on management representations concerning the appropriateness of the reserves and performed little substantive testing despite evidence that the reserves were improperly established and utilized. In the course of providing accounting and auditing services, the auditors failed to recognized evidence that the company’s establishment and use of the Cendant reserve did not conform to GAAP. According the GAAS, the auditor must maintain independence in mental attitude in...
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...Standards (IFRS) is the set of standard accepted internationally. Each set of rules has similarities and differences. The Financial Accounting Standards Board (FASB) is the entity responsible for developing GAAP and the International Accounting Standards Board (IASB) is the organization responsible for the IFRS development (Beltratti, Spear, & Szabo, 2013). Within recent years the organizations that govern these sets of principles has worked to make them more compatible to each other. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Ernst & Young, 2013). The FASB and IASB have been working towards ensuring that the concept of fair value will have the same meaning for both GAAP in the United States and IFRS internationally. First there is the issue of defining the meaning of fair value measurement. Also there is the issue of valuation techniques used to determine fair value. And there is the way each board mandates disclosure and reporting of these assets. There are differences within the FASB and IASB concerning different assets, liabilities, and equity instruments are measured at fair value. These are two different sets of rules and that mean assets, liabilities, or equity instruments that are measured at fair value in U.S. GAAP might not be measured at fair value in IFRS. What was done to try to alleviate this was a joint project to have...
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...affiliates are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). The Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. The SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets. New rules for the accounting for goodwill have been addressed in SFAS No. 142. To be able to complete the analysis of the work papers of my clients’, certain information must be obtained. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories, the inventories will decline in value. Although the primary basis of accounting for inventories is cost, when inventories usefulness become lower than cost, then the use of adjusting lower cost of market is accepted. There are many advocates that think that inventories should be valued at market price. The belief is assets should reflect current values. Generally Accepted Accounting...
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...| BENEFITS AND CHALLENGES OF FAIR VALUE ACCOUNTING | ACCT 525-22936 Current Issues in Accounting | Professor Kabani | Robert Larison | 10/20/2013 | In this paper I look at the benefits and challenges that are likely to follow the migration into the use of Fair Value Accounting. Perhaps, there is no issue today that carries with it as much controversy as does “FVA”. | BENEFITS AND CHALLENGES OF FAIR VALUE ACCOUNTING INTRODUCTION I do not think any topic in accounting has gathered as much interest as has the subject of “Fair Value Accounting” “FVA”. Heightened by the financial crisis of recent years “FVA” has received enormous attention by both academia and the business community alike. Rarely do “conspiracy theorists” make their way into the humdrum subject matter of accounting, but when it comes to the issue of “FVA” accounting, almost anything and everything has been postulated. The most widely held belief is that the move to “FVA” is to blame for the financial crisis of 2007. (Sorkin, 2008.) I have evaluated “FVA” and the transition from “historical value accounting “HVA”. In particular, I have researched the evolution within the Financial Accounting Standards Board (FASB) as it pertains to “FVA”. I have also reviewed the move toward the establishment of one set of standards for worldwide accounting as evidenced by the “convergence” project. With that in mind, we only need to look to the International Accounting Standards Board and its IFRS to get a...
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...Juggyfroot,” Rikey responded. The previous scene took place in the office of Deziloo LLP, a large CPA firm in Beverly Hills, California. Lucy Spheroid is the partner on the engagement of Juggyfroot, a global manufacturer of pots and pans. Ricardo Rikey is the managing partner of the office. Fred and Ethel are the two members of the firm that make final judgments on difficult accounting issues especially when there is a difference of opinion with the client. All four are CPAs. Ricardo Rikey is preparing for a meeting with Norman Baitz, the CEO of Juggyfroot. Rikey knows that the company expects to borrow $5,000,000 next quarter and it wants to put the best face possible on its financial statements to impress the banks. That would explain why the company had reclassified a $2,000,000 market loss on a trading investment to the available-for-sale category so that the “loss” would now show up in stockholder’s equity and not as a charge against current income. The result was to increase earnings in 2010 earnings by 8 percent. Rikey also knows that without the change, the earnings would have declined by 2 percent and the company’s stock price would have taken a hit. In the meeting, Rikey points out to Baitz that the investment in question was made in an affiliate company that Juggyfroot had owned for six years. Rikey adds there is no justification under generally accepted...
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...http://hbr.org/2013/03/why-fair-value-is-the-rule/ar/2 For the past two decades, fair value accounting—the practice of measuring assets and liabilities at estimates of their current value—has been on the ascent. This marks a major departure from the centuries-old tradition of keeping books at historical cost. It also has implications across the world of business, because the accounting basis—whether fair value or historical cost—affects investment choices and management decisions, with consequences for aggregate economic activity. The argument for fair value accounting is that it makes accounting information more relevant. However, historical cost accounting is considered more conservative and reliable. Fair value accounting was blamed for some dubious practices in the period leading up to the Wall Street crash of 1929, and was virtually banned by the U.S. Securities and Exchange Commission from the 1930s through the 1970s. The 2008 financial crisis brought it under fire again. Some scholars and practitioners have connected its proliferation in accounting-based performance metrics to the actions of bankers and other managers during the run-up to the crisis. Specifically, as asset prices rose through 2008, the fair value gains on certain securitized assets held by financial institutions were recognized as net income, and thus sometimes used to calculate executive bonuses. And after asset prices began falling, many financial executives blamed fair value markdowns for accelerating...
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...descriptive titles these assets are known under are plant assets or property, plant and equipment. Depending on the industry, the plant assets of a business can be a significant part of its total assets. That is why the accounting for these long-term assets has important implications for a company’s reported results. In this paper, we discuss the proper accounting for the acquisition, use, and disposition of property, plant, and equipment. Before going over a brief overview of the nature of accounting issues, we ought to take a deeper look at what plant assets really are. The major characteristics of property, plant, and equipment are as follows: * They are acquired for use in operations and not for resale. Only assets used in normal business operations are classified as property, plant, and equipment. For example, an idle building is more appropriately classified separately as an investment. Also, land developers or sub dividers classify land as inventory. * They are long-term in nature and usually depreciated. Property, plant, and equipment yield services over a number of years. Companies allocate the cost of the investment in these assets to future periods through periodic depreciation charges. The exception is land, which is depreciated only if a material decrease in value occurs, such as a loss in fertility of agricultural land because of poor crop rotation, drought, or soil erosion. *...
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...January 2011 Canada’s publicly accountable enterprises (PAEs) will have to adopt International Financial Reporting Standards (IFRS) as their accounting framework under which financial statements are prepared. This means the accounting standards Canada had been using generally accepted accounting principles (GAAP) will no longer apply. What will this mean for PAEs and their investors? Will there be more or less decision useful information and will securities markets become more efficient with Canada’s adoption of IFRS or is it the same business, just different accounting? Executive Summary Comparing financial statements internationally has become difficult as accounting rules and standards have evolved differently depending on the country due to history, culture, political influence and economics. That is why the IFRS have been created and currently there is almost 100 countries that adhere to IFRS standards. Canada too has decided it must join and in 2011 all Canadian PAE’s will report under IFRS. There are both pros and cons for investors who will be relying on financial information from companies that are using IFRS’s foundation. The adoptions of IFRS will likely cause recognition, measurement and presentation differences in a company’s financial statements. Although IFRS’s mandate is to provide a single set of high quality, understandable and enforceable global accounting standards there will be challenges that must be understood otherwise investor confidence will be eroded...
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...cost of market inventory on valuation, (2) capitalizing interest on building construction, (3) recording gain or loss on asset disposal, and (4) adjusting goodwill for impairment. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories the inventories will decline in value. Although the primary basis of accounting for inventories is cost when when inventories usefulness become lower than cost then the use of adjusting lower cost of market is accepted. There are many advocates that think that inventories should be valued at market price. The belief is assets should reflect current values. Generally Accepted Accounting Principles instructs that when inventories decline in value the future selling price should move in the same direction in the same time period. The American Institute of Certified Public Accountants provides the following definitions for use when applying the lower cost or market rule to inventories. These definitions are: 1. Market should not exceed the net realizable value. 2. Market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin (Schroeder, Clark & Cathey, 2005, p. 256). Adjusting lower cost of market inventory valuation satisfies the qualitative characteristics of account information...
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...delegated European accounting standard to IASB and all listed companies have to follow IFRS, main purpose behind proceeding was to reinforce the establishment of a single European capital market. Why should countries adopt IFRS? 1. It follows consolidated financial reports 2. IFRS is flexible 3. In order to reduce books and ambiguity The IASC initiative to reduce international differences in accounting practices. During period of time many events led changes such as 1. To avoid preparing multiple sets of book under different accounting regimes 2. To harmonize global financial reporting systems 3. Scandals emerged from 1997 southeast Asia IASB gained international acceptance in 10th anniversary with around 120 countries excluding China, India, Russia, US. Australia and Hong Kong has adopted IFRS as it is. Japan permitting IFRS from 2010, Brazil and South Korea allowed from 2011, Mexico and Argentina from 2011, India starting convergence from 2011. European Union adopted IFRS in 2005 first time when 7000 EU companies has prepared report IFRS compliant. IASB gained global acceptance when japan allowed its domestic listed companies to report under IFRS with option of US GAAP. China started first convergence with IFRS in the year 2006 and remained to be flexible and adjust accounting rules to the need of a national economy. The china standard ASBE is differed with IFRS in following way 1. China restricted use of...
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...questions as to why the information has been asked for in reference to the adjusting lower cost of market inventory valuation, capitalizing interest on building construction, the recording of gain or loss on asset disposal and the adjusting goodwill for impairment. I will be providing you with responses to your questions and have no doubt the answers will give you a better understanding on some of the accounting practices that may help increase the organization’s familiarity and practices from this analysis. Adjusting Lower Cost of Market Inventory on Valuation ARB No. 43 addresses the concern of inventory adjustments to lower of cost or market. GAAP maintains that the potential selling price will progress in the same direction and that probable future losses should be reported in the same period as the inventory decline. Companies should use the lower of cost or market method to value inventories. The AICPA has provided a definition to use in applying the LCM rule. As used in the phrase lower of cost market the term market means current replacement cost. Market should not exceed the net realizable value and market should not be less than net realizable value reduced by an allowance for an approximately normal margin (Schroeder, Clark, & Cathey, 2011). Using the LCM rule for inventories is uniform with the qualitative characteristics of accounting information. When the cost of inventory exceeds its projected benefit, a decrease of the inventory to its market value is an improved...
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...FAIR VALUE MEASUREMENT: IMPLEMENTATION ISSUES AND CHALLENGES (PART 1) (by Tuam Kwok Choon and Ng Kean Kok) INTRODUCTION Since the promulgation of fair value accounting by the International Accounting Standards Board (IASB), the subject matter has been hotly debated by industry players and professionals of the accounting fraternity the world over. Many problems and pitfalls have been highlighted on the "mark-to-market" premise. For example, David Gwilliam and Richard H.G. Jackson (2008) noted that Enron "was able to 'monetize' physical assets so as to bring them within the remit of mark to market accounting", suggesting misuse of fair value measurement. Fair value is said to be superior to other forms of measurement because it is easily understood by investors and stakeholders. It is also timely, neutral, representationally faithful, reliable, relevant, comparable and consistent. Fair value reporting is deemed to be more transparent and investor-confident. However equally important is that fair value measurement is subject to constraints such as human judgment, the location and condition of the asset/liability being measured, the determination of market, the most advantageous market value as against the entity's perspective, transaction price presumption (exit price verses entry price in different markets), the bid-ask spread of financial instsruments, and transportation cost exclusion, to name a few. Brief definition of fair value: Defined as, “The price that would be received...
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... Generally Accepted Accounting Principles other known as GAAP is an accounting standard used in the United States and the International Financial Reporting Standards better known as IFRS is an accounting standard in countries all around the world. The biggest difference between the two is GAAP is rules based and IFRS is more principle based. GAAP and IFRS strive to give accurate information to users but, GAAP gives different objectives for business entities and non-business entities unlike IFRS who only uses one objective for all entities. A balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, and footnotes are all required with GAAP. IFRS requires a balance sheet, income statement, changes in equity, cash flow statement, footnotes and a current and noncurrent report of assets and liabilities. FASB and IASB fair market value Those who use fair value measurements have the ability to see financial statements that show a more precise view of a company and its assets. IFRS and GAAP require businesses to include data in regards to fair value measurements in a financial statement. Businesses are required to report fair value depending on the circumstances. Component Depreciation Component Depreciation occurs when assets have different variables that should be depreciated with different treatments. IFRS businesses are generally required to use component depreciation when the parts of a business offer different patterns...
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