Corporate Reporting: Accountancy (Essay Sample)

Accountancy
CORPORATE REPORTING
EXAM
Accountancy
CORPORATE REPORTING
EXAM
Question 1 “Fair value remains the best existing accounting model for measuring certain items in financial statements” (Menicucci, 2015: 103). With reference to the literature, critically discuss the above statement. In your answer, provide a reflection on both merits and drawbacks of using fair value measurement in financial reporting. Menicucci, E. (2015) Fair value accounting. Key issues arising from the financial crisis. New York: Palgrave Macmillan.
(100 marks)
Fair value is defined as the price that would be used to sell an asset or the price that would be paid to transfer a liability in an organized transaction between participants in a market at the measurement date (PwC, 2021). The fair value would be considered an exit price and is measured using similar assumptions that market participants use as well as considering the same characteristics of an asset or liability including the location and condition of the asset and any limitations on its use or sale. Hence, a party may not argue that the prices are too low compared to the party's valuation of the asset and cannot similarly argue that it would be unwilling to trade at low prices. This paper presents a critical discussion that fair value remains the best existing accounting model for measuring certain items in financial statements.
Characteristics Fair Value
Fair value accounting in financial statements helps to assess some assets and liabilities at each date of the balance sheet, assess some assets and liabilities on their initial recognition in the financial statements or on the transition from national to IFRS, and to establish certain asset impairments (Betakova, et al., 2014; PWC, 2021). In many instances, only the option of measuring some assets and liabilities at every stage of the balance sheet is described as fair value accounting. Examples of significant items that call for the utilization of fair value accounting are goodwill and intangibles, stock compensation, hybrid financial instruments, troubled debt restructurings, and property, plant, and equipment.
Orderly transaction as used in fair value pricing assumes market exposure for a period before the measurement date to permit normal marketing activities to occur to guarantee that the transaction is not forced (Catty, 2009). Without an orderly transaction market, buyers may lower the price they are willing to part with for the asset because no adequate time was allowed for competition. Additionally forcing a seller to accept a price in a short time allowance means that the price does not become representative. In the long run, the fair value becomes acceptable if competitive tension has been allowed and there has been adequate time and information regarding the asset.
Merits and Drawbacks of Using Fair Value Measurement in Financial Reporting
Some of the advantages of fair value accounting are accurate valuation, true income assessments, and relevant and timely information (Gjorgieva-Trajkovska, 2016; Marra, 2016; Sebastian et al., 2014). Regarding accurate valuation, fair value accounting helps deliver an accurate assessment of assets and liability on an ongoing basis to a firm's reported financial information users. On the one hand, a firm can mark up an asset's or liability's value when its price is expected to increase or has already increased. As such, the markup price is raised to the current market price of the asset or liability to reflect what the firm would expect from the sale of the asset or how much the firm would part with to be relieved from the liability. On the other hand, the firm would mark down the asset's or liability's value to reflect any declines in the market price. Regarding true income, fair value accounting helps control the ability of a firm to possibly manipulate the reported net income. Under certain circumstances, the management can deliberately arrange sales of certain assets for instance to utilize losses or gains in the sales to decrease or increase net income as reported at the desired juncture. Through fair value accounting, firms can report, at the juncture in which they occur, any losses or gains from any price change of an asset or liability.
Regarding relevant and timely information fair value measurement use the information derived from existing market conditions and specific to the time. The excellent informative returns for the firm itself encourage prompt corrective actions. Furthermore, the informative power of financial statements is enhanced compared to other historical cost accounting methods. The measurement approach requires firms to disclose extensive information regarding the means used, related sensitivities, related risks, assumptions made, and other issues leading to a fair financial statement. Potential investors and contractors can benefit from such extensive information produced in financial statements due to fair value accounting that provides the real worth of assets as well as a better perception of a company's stability. 
Some of the drawbacks of fair value accounting include value reversal and market effects (Gjorgieva-Trajkovska, 2016; Marra, 2016; Sebastian et al., 2014). Regarding value reversal, fair value accounting can be challenging to firms and the utilizers of published financial reports. Market conditions of certain assets and liabilities can fluctuate sporadically and almost become volatile. Through fair value assessments, firms reassess the existing value of particular assets and liabilities despite volatility in market conditions and thereby potentially create unwanted swings in the value of the very assets and liabilities. Upon market stabilization, the values of the assets or liabilities revert to normal previous levels and render previously reported gains or losses temporary which implies that fair accounting could have provided the platform for misleading data at the time. Regarding market effects, fair value accounting can further adversely impact a down market. Under certain circumstances an asset that had been revalued downward due to declines in existing market trading prices cold in deals at the greater transactions in the asset at probably even more depressed prices. In the absence of fair value accounting-necessitated valuation markdown, firms may be unwilling to sell assets in a down market toward probable further downward spirals in asset valuations. In the absence of pressure to continue selling, the market schools in the long run stabilize and help preserve asset values. 
Conclusion
Despite its countable shortcomings, the advantages of fair value accounting like helping an investor know the measure of what the management expects to obtain as a return from a particular investment outweigh the shortcomings. A most profitable market optimizes the amount that would be transacted for the asset or made available for the transfer of liability after transaction and transportation costs. Where location implications are taken into account, the market price will be adjusted to cater for the costs that are incurred while the asset was transported to the market. A grasp of fair value accounting is important as well as knowing how much resources have been sacrificed to obtain the fair value. Market participants should be knowledgeable and independent of each other and willing and able to enter into transactions for the liability or asset.
QUESTION 4
"The aim of Financial Reporting Council (FRC) is to promote transparency and integrity in business."
Discuss critically how FRC was able to achieve this aim.
Introduction
The Financial Reporting Council (FRC)is considered an independent regulatory body that aims to promote high-quality corporate governance based on proper reporting and investment. This council is structured in that it has board members, senior personnel and a reviewing panel (Akther & Xu, 2020). The council is also associated with various benefits that are identified to be helpful in accounting entities in maintaining uniformity and fair reporting. It is also clear that the council is entitled to formulate issues and ensure an effective revision of the accounting policies responsible for governing all financial statements and reporting them. Furthermore, the council is subjected to ensuring that there promotion of transparency and integrity within the business.
Promotion of transparency
FRC has played a vital role in promoting transparency and integrity within the business. Transparency in a business can be illustrated as a state where trust is enhanced between the business organization and the investors who are contributing to the success and smooth running of the business. In the attempts to promote transparency, FRC has achieved this state through effective implementation of its roles within the business. First, FRC has ensured that all accounting standards have adhered to in a business (Akther & Xu, 2020). Accounting standards in a business can be described as rules that the FRC has enacted for all users of the financial statements to develop and ensure that there is an adequate evaluation of the limited and allocated resources within the business. The role of the FRC in maintaining accounting standards has ensured that transparency has been achieved through a state where it helps the directors in the process of discharging obligations related to financial reporting. By applying accounting standards, there is an adequate performance assessment, evaluating the state of the business liabilities and assets. Therefore, relating to FRC's role, there is the effective promotion ...