Essay: How Fair is Fair Value - Extended
Essay: How Fair is Fair Value?
In this essay an examination will be made of what fair value is; under which accounting standards it can be found; and generally where, how and why it is used at present. Following reports, discussions and subsequent amendments that have been made to fair value recently, an exploration of these areas may uncover what changes have occurred overall in the way fair value is reported; it's transparency in the public domain; and how it affects business as a whole. The concluding points will examine if there is a need to remedy the present system and if so how to establish better reporting of fair value.
It is important to understand that good financial reporting is essential to provide a true and fair picture of the financial position at a particular time. Without this in place great difficulties would be faced by many organisations and individuals; unreliable or non-relevant information would be difficult to use at best and misleading at worst. If there are vast differences between the information provided by some organisations to those given by others, comparison is somewhat difficult and can prove useless. If the rules are not clear and stringently maintained it can allow personal interpretation. It is, therefore, understandable why the IASB has taken steps to adopt a more definite and understandable approach.
... Historical cost accounts were traditionally based on three concepts: realisation, where profits were not recognised until they were realised, matching, where revenues were matched with costs and lastly prudence, where an element of conservatism was implied (Ernst & Young/ey.com/fairvalue; /14.01.2007).
Positively stating in the fair value argument is Jane Croft writing for the Financial Times. The fair value option in IAS39 "would allow companies to measure all financial assets or liabilities at fair or market value, and records gains and losses on them in the profit and loss account" (Jane Croft/FT.com/19.12.2004). There are arguments to the contrary, in favour of historical costing. Inder K. Khurana and Myung-Sun Kim of the School of Accountancy, University of Missouri when looking at the effects on small bank holding companies (BHCs), highlight this in their American study. They were "unable to detect a discernable difference in the informativeness of fair value"(www.sciencedirect.com/14.01.2007). Although for small BHC's historical costing proved more valid than fair value; the existence of a suitable market had significant affect on whether fair value was more or less useful.
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Having examined fair value reporting, the system is clearly not satisfying its users as yet. Whilst the ideas behind the changes already undergone have to some extent been welcomed, there is a general feeling that they do not go far enough and have their order of importance incorrectly rated. If it is accepted that the traditional method of historical cost accounting is unreasonable an alternative must be considered. Yet for fair value to be accepted and advocated further changes need to be undertaken to emphasise the financial reporting principles, namely, understandability, reliability, relevance and comparability (Ernst & Young/ey.com/fairvalue; /14.01.2007). This will ensure that those involved in financial reporting follow these principles stringently. There is no room for unreliability; the IASB must reconsider its present position to accommodate a more judged and less calculated qualification of fair value. The concept of 'true and fair' within accounting does not lend itself to a mathematical approach; it should not be taken in its full emotive meaning either, a careful evaluation within set principles that all could understand and adhere to would be a sensible and appreciated step forward for the IASB.
This is a well structured extract which carries authority and has elements of analysis and criticality. The essay is well-organised which makes it easier for a reader to follow the writer"s argument and evidence. The introductory and concluding paragraphs are generally well-written and the introduction gives clear signposting and justification for the essay. The conclusion summarises key points from the main essay and ends with the writer"s own conclusions.
This is a good opening paragraph which sets out the structure the essay will take. A common pattern in a good essay is to open it with a general paragraph such as this which provides signposting for the reader.
The acronym IASB should really be spelled out in full here (International Accounting Standards Board) as this is the first time it has been encountered in this essay.
A fully expanded version of the acronym IAS 39 (International Accounting Standard 39) is needed and more explanation (such as. "IAS 39 which considers the recognition and disclosure of financial instruments...") would be preferable.
The acronym (BHC) is correctly introduced here, i.e. after the full term has been given. The acronym alone can now be used.
This phrase gives the writer"s view without explicitly stating it. This is much better than an alternative such as " I think it is important" . It avoids the use of the first person pronoun "I", which is not normally acceptable in academic writing.
Repetition of the term "understandable" could have been avoided here. A better wording might be "It is, therefore, clear why the IASB has taken steps to adopt a more definite and understandable approach."
The fact that the same phrase structure is used for each of the three definitions here makes this section clear and pleasing to read.
This sentence might better be phrased: "Jane Croft, writing for the Financial Times, presents an argument in favour of the use of fair value."
This phrase is a neat way of referring back to the previous section and avoids the use of the first person pronoun "I", which is not normally acceptable in academic writing.
A better word here might be "definition".
This is a good explanation of the importance of providing relevant and reliable information in financial reports. This is a general paragraph which sets the scene for the essay. The choice of valuation measure is important because of the need for "good" financial information for comparison and decision making.
This paragraph, although a little long, sets out some key arguments for and against the use of fair value as a form of measurement. When setting out an argument it is important to consider both sides, as has been done here.
This paragraph describes the key attributes of historical cost as an alternative and more "traditional" measure of value within the financial statements. A clear definition is given for each attribute identified.
It is important to acknowledge all sources of information, theories and ideas even if you are not using a direct quote. A better way of referencing this source would be to include "Ernst & Young+ year" in the text and the complete reference, including web address and date last accessed, in a reference list.
Using a quote provides authority when explaining the fair value option in IAS 39. It is good to acknowledge the source of material but a better way would be to include "Croft (2004)" in the text and the complete reference including web address and date last accessed in a reference list.
This sentence uses a recent academic study to support one of the arguments in favour of historic cost. This is good as it provides a current example and lends authority to the point being made.
Using a quote here gives greater authority to the point being made that fair value measurement is not necessarily better than historic cost. It is good to acknowledge the source of material but a better way would be to include "Sciencedirect + year" in the text and the complete reference, including web address and date last accessed, in a reference list.
It is good to acknowledge the source of material but a better way would be to include "Ernst & Young+ year" in the text and the complete reference, including web address and date last accessed, in a reference list.
A good concluding paragraph which summarises the main findings and reaches a carefully judged conclusion. There is a balanced use of authoritative language ("must" and "need") with an academic tone, and the section is very convincing.
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