Accounting Treatments Required IAS for Financial Liabilities - Term Paper Example

Accounting Theories Part 1: Accounting for Preference Shares 1/1/2010 31/12/2010 31/12/2011 31/12/2012 1st January 2010 it issued £25 million 2% £1 preference shares at par $ 99.98 $102.33 $104.78 $107.33 1st January 2010 it issued £25 million 2% £1 preference shares at par $ 99.98 $102.33 $104.78 $107.33 1st January 2010 it issued £25 million 2% £1 preference shares at par $ 99.98 $102.33 $104.78 $107.33 1st January 2010 it issued £25 million 2% £1 preference shares at par $ 99.98 $112.53 $115.18 $118.03 Part B. accounting treatments required IAS for financial liabilities According to the IAS 39- Accounting for financial instruments: Recognition and measurement; the standard provides the provisions for measurement and recognition of financial liabilities, financial assets and the agreements to sell or buy non financial instruments. Financial instruments are originally identified whenever an accounting entity is part and parcel to the contractual prerequisites of the financial instrument (Elliott & Elliott, 2013; p. 1). These are grouped into different classes relying on the type of financial instrument, which then shapes the successive measurement of the financial instrument. This is specifically the amortized cost or the fair value. Specific rules often apply to embed the hedging instruments and financial derivatives. Monetary securities IAS number 39 is applicable to monetary securities issued. Nonetheless, in case an issuer of contract of financial guarantee has earlier on stressed openly that it takes into consideration such agreements as a contract of insurance and has applied accounting that applies to insurance agreement; the issuer has an obligation to apply IAS 39 to such contracts of financial security. Accounting by the financial liability holder is not included from the dimension of IAS 39 as well as IFRS 4. Thus paragraphs 10-12 of IAS 8 “Accounting policies, changes in accounting estimates and errors” will apply. Financial liabilities commitment The commitments to financial liabilities fall outside the scope of IAS 39 in case their obligation cannot be fulfilled net a different financial instrument or in cash. In this case they will not be classified financial liabilities at fair value via loss or profit hence the entity lacks the historical practice of selling the financial liability that came from the commitment after origination. An issuer of a financial liability or commitment to issue a financial liability at an interest rate below the market value is obliged to recognize the liability at its fair value. Successfully, the issuer of the financial liability will re-determine it at a much increased value which is recognized under the IAS 39. Besides, the value originally realized will be less where relevant, cumulative pay back is recognized in line with the IAS 18 (Penman, 2007; p. 35). According to IAS 32 on presentation of financial instruments which outlines the requirements for accounting for presentation of the instruments in particular the grouping of such financial instruments into financial liabilities, equity and financial assets. Therefore, provisions are made on the guideline of classifying the interests, gains and losses as well as related dividends (Ball, 2006; p. 17). It also includes guidance when the financial liabilities and assets can be settled. The fair value which is the measure for which the asset might be swapped or a liability fulfilled. These are guidelines that will be applied by Yeats PLC where the company would prefer to pay a constant rate dividend rate and have a compulsory recovery feature at a forward date. The main consideration here is to deliver cash and hence recognize it as a financial liability. Part 2: fair values in accounting for financial instruments In spite of the concerns raised on the fair values in accounting for financial instruments, this is best available way of replicating the market situations. The use of fair values in accounting for financial instruments is both useful and reliable since it offers the best information to users of financial statements. The effect of fair value measurements regardless of positive or negative values of a given company is the true reflection of the market factors and forces. The present situations dig into the question whether the users of financial statements are prepared for the fair value figures and accounting for particular non-financial transactions (Laux & Leuz, 2009; p. 827). The investors gain when the organizations or firms reveal their opinions on the effect of illiquidity in the market in the financial statements reporting. Impact of fair value accounting in the U.S market In recent times the U.S markets started experiencing substantial volatility and illiquidity making situations that made assessments of fair value more divisive. The current value of multifaceted and innovative financial instruments like mortgage-related stocks, financial derivatives and other financial products is conditional to market volatility and illiquidity. Even though fair value accounting methods can be applied to other liabilities and assets, the main attention of this concept is on financial instruments such as financial assets. Implications of fair value accounting Whilst most people will agree that fair value results into more appropriate determinants compared to historical measurements, is not indeed perfect. Currently, there are two disagreements that envelop measurements on fair value accounting in volatile markets and the time and methods the modelling must be applied in determining the fair value. Fair value dimensions in illiquid markets The latest market situation has led to huge write-downs via which the use of fair value determinants applies. Majority of the lawsuits have taken place within the banking and broker deals industries. Firms offering protection on credit via swaps on credit default on the fundamental assets contrary to contracts of insurance have been influenced by the measurements of fair value. Although, the default that would stir security might not have taken place, the firms were obliged to recognize the losses unrealized on the agreement at the time the fair value of the essential assets were considerably reduced. Moreover, some companies with ventures in auction deals with rated securities experienced a decline in the value of the securities. The provisions to apply fair value determinants have also been under criticism for leading into erroneous outcomes in the abnormal market situations newly encountered. Such outcome is contended to harm the firm in the long term. In case a company has to realize losses in such a setting, as claimed by critics, it is a sign of bad news to shareholders that might be finally confusing. Thus, they allege that it is better to realize only profits and losses. In taking into account this disagreement, it is vital to identify that principles of accounting like fair value accounting are established with the aim of giving data that will effectively meet the interests of shareholders, policymakers and business in the long run. Fair value might not be perfect but when accompanied with appropriate disclosures it produces the best outcome, in particular where models are applied to establish the fair value. Even though shareholders generally think that fair value is relevant for determining financial instruments, they are worried about the application of fair value whenever it is not clear how to establish pricing in the market. Fair value determinants demand application of market prices in spite of how unpredictable the market might be or refer to pricing of similar stocks. In case where the alternatives do not exist, the firms use models to establish the fair value (IASB, 2007). Volatility of earnings at times does take place whenever the markets become unstable and market prices are unavailable. When the methods mentioned before for establishing the fair value are used, the impact on earnings might be as erratic as the market place. The impact of measurements of fair value on long run value is another issue of concern (Bradshaw et al, 2010; p. 4). However, regardless of whether any specific use of measurements of fair value precisely replicate the long term value can only be devised in the long run. Fair value determinants support financial statements to demonstrate the manner in which financial derivatives are being influence by the present market situations which results in an improved openness to all stakeholders. In measuring and reporting financial assets, fair value is considered as the best method. Fair value is found is found on the market determinants or in restricted cases approximates of them. Some of them have been argued that the current valuations in the market of some complex stocks do not replicate the final long term truth for instance in scenarios where the market for those instruments become volatile. The complex issues of valuation are understood because they transparent to rational disputes on either sides. Therefore it is vital to encourage the people whose opinions about the end decisions result into disputes with the use of fair value figures to reveal their opinions within the financial evaluation (Landsman, 2007; p. 23). Cost accounting might conduct valuation of financial derivatives at the cost of acquisition as opposed to their value in the event they sold in the existing market. Majority of the shareholders opt for present valuation since it is more appropriate. Information on historical cost for financial assets lacks economic backing to the purchase, sale, or decisions related to holding which the management are obliged to make everyday. The security exchange commission is however worried about the consistency and quality of the presumptions and decisions intrinsic in measurements of fair value. By use of direct requests to many firms, the SEC is seeking for increased openness in the disclosure statements revolving around methods and techniques of valuation in particular at main financial facilities (Pratt, Reilly & Schweihs, 2000; p. 13). For financial derivatives, the U.S GAAP and IFRS are in general reliable. Nonetheless, for liabilities and non-financial assets, international financial Reporting Standards in general promote an increased application of fair value compared to the U.S GAAP (Véron, 2008; p. 3). Based on the above discussion it is the conviction of the stakeholders that many events have focused on the challenges that are in existence when applying fair value accounting methods when the markets are effectively stable to enable establishment of the fair values. For cases of non-financial liabilities and assets, these conflicts might be intensified. The present situations demand questioning of whether everyone is prepared to use the fair value accounting for any specific non-financial liabilities and assets. Bibliography Ball, R. (2006) ‘International Financial Reporting Standards (IFRS): pros and cons for investors’ in Accounting and Business Research. vol. 36, sup. 1, pp.5-27. Bradshaw, M., et al (2010). Response to the SEC's Proposed Rule- Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers. Accounting Horizons (24)1 Elliott, B. & Elliott, J. (2013) ‘Chapter 14 – Financial Instruments’ in Financial Accounting & Reporting (16th Edition), Pearson; International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis, Landsman, W. (2007) ‘Is fair value accounting information relevant and reliable? Evidence from capital market research’ in Accounting and Business Research, vol. 37, supp. 1, pp.19-30. Laux, C. & Leuz, C. (2009) ‘The crisis of fair-value accounting: Making sense of the recent debate’ in Accounting, Organizations and Society, vol.34, pp.826-834. Penman, S. (2007) ‘Financial reporting quality: is fair value a plus or minus?’ in Accounting and Business Research, vol. 37, supp. 1, pp.33-44. Shannon P. Pratt, Robert F. Reilly and Robert P. Schweihs (2000) Valuing a Business, 4th Edition, McGraw-Hill. Véron, N. (2008) ‘Fair value accounting is the wrong scapegoat for the crisis’, Breugel Policy Contribution, May 2008 available at http://hdl.handle.net/10419/45516. Read More