The paper "Fair Value Accounting System " is a great example of a finance and accounting coursework. Accounting plays a fundamental role in controlling and directing an organisation. Accounting directs and controls organisations by encouraging appropriate decision making and by requiring disclosure about important areas of corporate governance. Managers’ motivation to carry out financial disclosure is dependent on corporate governance and strategies. One measurement method for financial disclosures is fair value accounting. Fair value accounting can be termed as the method used to measure and estimate the potential market price of assets and liabilities.
The use of fair value accounting has increased over the years reducing the use of traditional bookkeeping methods. Fair value accounting is said to make the accounting information and data more relevant. However, there has been some concern about the reliability of this accounting system. This paper will discuss the viability of the statement: “ If all financial statement preparers worldwide used fair value accounting as the only measurement method for financial disclosures then managers would have no incentive to manipulate accounting numbers or engage in earnings management. ” Fair value accounting system is immensely used today.
Almost 100 countries across the world use fair value accounting extensively. For instance, Accepted Accounting Principles in countries like the United States continue to utilize fair value concept. Fair value endeavours to capture the quality of value in order to fulfil the standards of the conceptual framework. The fair value accounting system assumes that the transactions that are involved in selling an asset or transferring a liability occur in the principle market or in the absence of the principal market. Fair value accounting is used to measure financial disclosures.
Measurement is the process by which monetary amounts are determined through calculations, estimation or apportionment. If different measurement systems are used in accounting calculation, no practical meaning can come out of the aggregate entailing cost, fair and value. However, fair value accounting is used to minimize this problem. The conceptual framework does not necessarily establish the measurement bases to be used. Historic cost measurement accounting system is considered the dominant method. As mentioned earlier, the historic cost system has been replaced by fair value accounting. An example of accounting theory that predicts accounting practice to be used is agency theory.
Agency theory is a framework that is used to evaluate the relationship between parties offering accounting information and parties using the accounting information. According to the theory, the demand for voluntary disclosure is as a result of stewardship and decision-making purposes. As a result of the imbalances between information suppliers and information users, the risk exists and maybe misallocated between the involved parties. In an event where the market mechanism is not sufficient, accounting regulation may be necessary to reduce inequitable results.
Agency theory illustrates that accounting information may be utilized to unite the interests of information supplier and information user. Accounting information may reduce agency problem and therefore information disclosure is important. In order to unite the interests of parties, management earnings may be necessary. Any accounting method used should offer an incentive for managers to engage in earnings management. Earning management is important as it measures entity performance and is strongly connected to share value. Earning management is the use of judgment and perception to alter financial reports in order to mislead stakeholders about the economic condition of an organisation or to influence the contractual results that rely on accounting numbers.
Earning are managed in order to benefit the company by meeting shareholder needs and expectations and to meet the short-term goals that often result to maximize managerial salaries and remunerations. Earnings management may be effective if used responsibly and thus full disclosure assists to regulate bad earnings management. Earnings can also be managed by manipulating accounting numbers to yield a growing profit stream and increase remuneration.
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