StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Fair Value Accounting, Financial Economics, and the Transformation or Reliability - Literature review Example

Cite this document
Summary
The paper “Fair Value Accounting, Financial Economics, and the Transformation or Reliability” provide evidence on the drivers of fair value application in accounting. It explains how fair value accounting gained such a role before the financial crisis of 2007 despite the growing opposition…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97% of users find it useful
Fair Value Accounting, Financial Economics, and the Transformation or Reliability
Read Text Preview

Extract of sample "Fair Value Accounting, Financial Economics, and the Transformation or Reliability"

The author of the article “Fair value accounting, financial economics, and the transformation or reliability” draws from several summaries and analyses to discuss the debate about fair value. The discussion focuses on how the notion of accounting and reliability emerged and was articulated before the financial crisis. Further, the paper examines the rise of financial economics as a challenge to and as a cultural resource for financial accounting. Power then discusses how accounting for derivatives challenged the credibility of accounting while acting as a catalyst for the significance of fair value as well as for reliability. The author further notes that the de-legalization of the balance sheet created a demand for accounting numbers in the balance sheet.

Analysis
The author argued that four main conditions led to the significance of fair value accounting before the financial crisis. One of them was the cultural authority of financial economics. Power (2010) argues that financial accounting has increasingly drawn on the cultural authority of financial economics – an authority that is not in question. Power (2010) argued that the pro-cyclicality of fair values was demonstrated by the financial crisis. This is consistent with the arguments by Allat (2001:22) that fair value accounting leads to more restrictive lending policies and more demanding loan covenants. Chea (2011:15) agrees with the sentiments of Power (2010) that reliability is being reconstructed by shifting the focus from transactions to economic valuation methods hence giving the methods a firmer institutional footing. A study by Mikes (2013:3) demonstrated that even though risk controllers draw on the authority of financial economics, such credentials do not automatically lead to credibility in the organization.

The second argument for the significance of fair values in accounting as articulated by Power (2010) was the problems related to accounting for derivatives. The author argued that derivatives posed a challenge to the existing accounting logic of appropriateness. Their historical cost was irrelevant to their value over time. Another problem was the financial classification. Derivatives accounting therefore embedded the principle of fair value accounting as the mirror of the market. While acknowledging market-to-market reporting for derivatives, Chea (2011) agreed with the use of fair values for derivatives reporting. Metzger (2010) noted that the use of fair value accounting for derivatives reporting enhances accountability, transparency, consistency, inter-period equity, and risk management. Further, Zhou (2011:36) found evidence that the recognition of the fair-value-based hedging performance measure under SFAS 133 improves the value and risk relevance of accounting earnings. The studies by Barth et al. (1996), Eccher et al. (1996), and Nelson (1996) examined the value relevance of fair value information including derivatives and found that fair values of investment securities have explanatory power beyond the book value.

Power (2010) also cited that the third reason for the significance of fair value accounting was the transformation of the balance sheet by conceptual framework projects from a legal to an economic institution. The author argued that this created demand for asset and liability numbers to be economically meaningful. This demand could be satisfied by fair value. According to a study by Nissim and Penman (2007:71), “expanding fair value accounting is not likely to significantly improve the information in bank financial statements and, in some cases, may introduce distortions that reduce accounting quality”. This argument is therefore against the application of fair value to measure assets and liabilities in the balance sheet.

Power (2010) further argues that fair value accounting became significant to the development of a professional, regulatory identity for standard-setters. The author argued that while standard-setting bodies are less sensitive to specific private interests, they are more sensitive to other transnational bodies and specific nations who wish to exercise veto rights. Cortese and Irvine (2010) referred to this situation as a “black-box” where powerful extractive industries, entities, and coalitions covertly the IASB as regards the implementation of IFRS 6 to secure their own ends thereby ensuring that the status quo was maintained. These standards are usually scrutinized by some countries before adoption as noted by Palea (2013) in the case of IFRS 13 and IFRS 9 by the European Commission.

While the author provides the reasons for the significance of fair value accounting even before the financial crisis, it does not discuss the role of specific individuals in the fair value debate hence lacking a more complete analysis of the role and power of key actors in fair value application in accounting. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Need to do a critical review on the article: Power, M (2010) Fair Literature”, n.d.)
Need to do a critical review on the article: Power, M (2010) Fair Literature. Retrieved from https://studentshare.org/finance-accounting/1624068-need-to-do-a-critical-review-on-the-article-power-m-2010-fair-value-accounting-financial-economics-and-the-transformation-of-reliability-accounting-and-business-research-40-3-pp197-210
(Need to Do a Critical Review on the Article: Power, M (2010) Fair Literature)
Need to Do a Critical Review on the Article: Power, M (2010) Fair Literature. https://studentshare.org/finance-accounting/1624068-need-to-do-a-critical-review-on-the-article-power-m-2010-fair-value-accounting-financial-economics-and-the-transformation-of-reliability-accounting-and-business-research-40-3-pp197-210.
“Need to Do a Critical Review on the Article: Power, M (2010) Fair Literature”, n.d. https://studentshare.org/finance-accounting/1624068-need-to-do-a-critical-review-on-the-article-power-m-2010-fair-value-accounting-financial-economics-and-the-transformation-of-reliability-accounting-and-business-research-40-3-pp197-210.
  • Cited: 1 times

CHECK THESE SAMPLES OF Fair Value Accounting, Financial Economics, and the Transformation or Reliability

Fair Value Accounting during the Financial Crisis

[Name of Student] [Name of Instructor] [Name of Course] [Date] fair value accounting During the Financial Crisis Part 1: Introduction: The financial crisis of 2007 has been a basis of a number of problems being faced by the international business and accounting profession in particular.... The major concern of the debaters was the implication of fair value accounting systems which led to the situation where it has been blamed for facilitating the sustainment of the financial crisis which has led to massive government bailouts of financial institutions....
21 Pages (5250 words) Research Paper

The Qualitative Characteristics of Relevance and Reliability

Relevance and reliability Your Name Due Date List of Contents Introduction………………………………………………………3 Theory…………………………………………………………….... These are understandability, relevance, reliability and comparability (Para 24).... Understandability and comparability can be discussed in the context of relevance and reliability as they cannot be separated from each other.... 7 Introduction financial reporting is a legal requirement of a company....
15 Pages (3750 words) Essay

Current issues in financial reporting

Name: Tutor: Course: Date: University: Introduction the transformation of information-based economies to knowledge based requires the procedures that relate to the accounting, management and finance.... reliability in personnel in any organization is crucial, and the attachment of monetary value to the human resource and reporting in financial statements forms the Human Resource Accounting (HRA).... This paper explains the importance of financial reporting in organization, and gives the reasons for and against capitalising human resources in the financial statements of a company....
5 Pages (1250 words) Essay

The Ethics of Creative Accounting

On the other hand, it is argued that the preparers of the financial statements can manipulate the financial statements by the transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring some or all of them (Nasar, 1993:2).... In this report 'The Ethics of Creative Accounting' the objectives of financial statements as valid and reliable information sources regarding an entities' financial performance and changes in its financial position are critically evaluated....
14 Pages (3500 words) Assignment

Fair Value of Accounting

The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value fair value accounting has cemented its place really well in the world of accounting on the grounds that it gives more relevant information to users.... According to Patricia McConnell1, fair value accounting method requires the preparers of financial statements to adjust them according to the fair values....
5 Pages (1250 words) Research Paper

Fair Value Accounting, Financial Economics and the Transformation of Reliability

In the journal article, Power addresses the question and the reasons for the use of fair values or practices during accounting before the year 2007 despite there being several misgivings about the fair practices (Power 2010, p.... 197).... He argues that there are four reasons that....
4 Pages (1000 words) Essay

Fair Value Accounting

The paper " fair value accounting" is a perfect example of an essay on finance and accounting.... The paper " fair value accounting" is a perfect example of an essay on finance and accounting.... For assets that are valued on basis of historical costs, fair value accounting is not used.... Most economists are of the opinion that fair value accounting helps in rendering accounting information more reliable.... fair value system of accounting involves the practice of estimating prices of assets and liabilities on the basis of current market value, instead of their book value....
6 Pages (1500 words) Essay

The Social Economic Context of Financial Accounting and Reporting

fair value accounting is the dominant paradigm used in the evaluation of finances and is an ever-present notion when evaluating different non-financial elements.... This paper describes how financial reporting especially fair value accounting (FVA) has the ability to cause conflict between managers, stakeholders and employees.... This paper has focused on the effect of fair value accounting in the United States as well as in China.... Accounting and financial reporting have significant consequences that are beyond finance and economics....
10 Pages (2500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us