Presence of Manipulation in Financial Statements †MyAssignmenthelp

Question: Discuss about the Presence of Manipulation in Financial Statements. Answer: Introduction The concept of fair value has been recognized as highly important by the IASB (International Accounting Standards Board) for improving the quality of financial reporting. The use of fair value accounting ensures in providing accurate value of assets and liabilities of a company based on their current market valuation. However, the use of historical cost accounting only records the initial value of assets and liabilities at the time of their purchase without any adjustment made in relation to their market value (Dignah et al., 2016). In this context, the present report discussed the concept of fair value introduced by AASB 13 in Australian accounting standards by critically examining its limitations in providing decision-useful information to the end-users of the financial statements. Concept and Limitations of Fair Value Accounting The IASB has directed the business entities around the world to incorporate the use of IFRS 13 standard regarding the fair value measurement. In this context, the AASB (Australian Accounting Standard Board) has also adopted the standard of fair value measurement through development and introduction of AASB 13 accounting standard. As per the AASB 13 standard, the fair value can be stated as a market-based measurement approach for identifying and measuring the values of assets and liabilities. The fair price of an asset or liability indicates the market price at which orderly transaction relating to selling of an asset or transferring a liability occurs on the date of measurement between the market participants. The approach to fair value measurement assumes that the transaction has taken place in a principal market or in the most advantageous market if the principal market is not present (AASB 13, 2015). The use of fair value accounting in the development of financial reports is regarded to be a topic of debate among the accounting professionals. This is because the measurement technique is associated with some drawbacks that limit its usefulness in disclosing the reliable and accurate information to the end-users. For example, there are some business organizations that do not realize any gains from the use of fair value accounting approach due to large fluctuations in the value of their assets. Thus, the presence of high volatility in the asset value makes it difficult for the companies in accurate prediction of their market price related to long-term financial picture therefore leading to reporting of misleading income or losses in the short-term financial performance of a company (Gjorgieva-Trajkovska and Temjanovski, 2010). As such, the investors do not realize the use of fair value accounting to be useful in securing and protecting their investment. The use of fair value account ing is dependent on assumptions and therefore it can report misleading information relating to the overall value of a business entity. The investors as such are still having believes in the use of historical cost method as it helps them to analyze the initial value of an asset or liability at the time of the purchase. The historic cost approach provides investors the information related with price of an asset or liability as compared with their investment costs (Hassan, Percy, and Stewart, 2006). The investors and creditors have also regarded that the use of fair value accounting to be significantly contributed to the occurrence of financial crisis. The fair value recognized of an asset or a liability is largely dependent on the market situation and thus the fluctuations in the market conditions can result in degrading the overall value of a firm. This subsequently result in causing the downturn of the market economy and thereby leading to the occurrence of financial crisis as that occurred in the year 2007. The financial analyses nod the accounting professionals have regarded to the use of fair value accounting for significantly contributing to the financial crisis by enhancing the downturn of the financial institutions around the US (Alaryan et al., 2014). One the important limitation of the fair value accounting is the value reversal. There are many challenges that are faced by the companies and also the users of the financial statements as it is not easy to understand all the disclosures made under the fair value accounting. Company works mainly in the volatile market conditions where there is need to value the assets and liabilities that make larger differences in the market value of company and value that is reported in the balance sheet. But when the market become stable the value changes that allows making changes to the value of financial items back to normal. So it can be said that changes that are made in the value of assets or liabilities are temporary period that proves the fair value accounting provides misleading information to the users of the financial statements (Qu et al., 2012). Companies have to face the market effects of the fair value accounting that can be also be a limitation for the entities using fair value concept. Fair market value impacts the company assets in the down market conditions. When the values of assets are revalued downwards due to change in market condition allows companies to settle the assets through selling the assets at much lower price. So it can be said that companies have to face losses through adopting the fair market value concept (Gjorgieva-Trajkovska and Temjanovski, 2010). Conclusion It can be said from the overall discussion that fair value accounting has not proved to be largely helpful in supporting the decision-making process of end-users. References AASB 13. 2015. Fair Value Measurement. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed on: 28 September 2017]. Alaryan, L. A., et al. 2014. The Relationship between Fair Value Accounting and Presence of Manipulation in Financial Statements. International journal of accounting and financial reporting 4 (1), pp. 221-237. Dignah, A., et al. 2016. Fair Value Accounting and the Cost of Equity Capital of Asian Banks. Jurnal Pengurusan 48, pp. 125 135. Gjorgieva-Trajkovska, O. and Temjanovski, R. 2010. Fair Value Accounting Pros And Cons. Faculty of Economics. Hassan, M. S., Percy, M.,and Stewart, J. 2006. The value relevance of fair value disclosures in Australian firms in the extractive industries. Asian Academy of Management Journal of Accounting and Finance 2 (1), pp. 41-61. Qu, W., et al. 2012. Does IFRS convergence improve quality of accounting information? - Evidence from the Chinese stock market. Corporate Ownership Control 9 (4), pp. 187- 196.