The paper "Measurement Approach to Decision Usefulness" is an outstanding example of a finance and accounting coursework. The focus of this paper is to undertake a clear analysis on whether a measurement approach can be used to make accounting information more useful for purposes of decision making in organizations (Abarbanell and Bushee, 1997). The main assumption made in this paper is that the measurement approach in financial reporting differs greatly from the information approach that has been used widely in financial reporting (Johnson, 2003). The reason for this is that the information approach focuses on providing useful information that can be used to make future predictions of the performance of the firm. The measurement approach is defined as a financial reporting approach or perspective where organizations accountants take as their responsibility to entrench fair values during financial reporting into the financial statements in order to provide investors with the ability to make accurate predictions about the performance of the firm in the future (Feltham and Ohlson, 1996). The measurement approach obligates the accountants to move further from the information approach as one way of empowering the investors (Patricia, 2001).
Different reasons for including and giving fair values more attention in financial statements, including evidence and theory that market for securities is not always efficient are proposed in this paper. It is unlikely that the historical-cost method of accounting will be replaced by the measurement approach. However, it seems likely that the balance of fair value-based and cost-based information in the statements of accounts is moving towards the direction of the fair-value based method (Patricia, 2001). Given the numerous problems that have arisen due to the application of RRA accounting techniques, this may seem strange to a certain extent (Beaver, 1999).
However, the change in emphasis where financial statements reporting are moving towards the direction of fair-value reporting can be explained through a number of reasons (Greene, 2000). Examples of measurement Derivatives instruments Even when they are based on historical cost, financial statements contain fair value estimates. Examples of fair value estimates contained in financial statements include accounts payable, accounts receivable, capital assets ceiling test, and the cash flows fixed contract (Patricia, 2001). The requirements of terms and conditions, as well as fair value and credit risk information, are important (Feltham and Ohlson, 1996).
The measurement perspective is largely required in accounting for derivatives because for purposes of the balance sheet, the measurement of derivatives must be undertaken using the fair value approach with fair value changes shown in the net income (Beaver, 1999). Hedge Accounting Hedging occurs when a hedging instrument (liability or asset) is acquired by a firm with a risky asset in the effort to offset the loss or gain on the hedged item. The value of the hedging instrument and the hedged item should move in the opposite direction.
However, this is not always the case and the basis risk emerges (Patricia, 2001). Because hedging accounting may want to have losses and gains matching becomes an important concern. The SFAS 133 accounting requirements have occurred where fair value losses and gains on current earnings are included thus raising the need for the measurement approach (fair-value oriented) to be used in hedge accounting (Patricia, 2001).
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