Choice between Single Measurement and Mixed Measurement Model - Coursework Example

Student’s Name Professor’s Name Course Name Date Financial Accounting Issues: Choice between Single Measurement and Mixed Measurement Model The undying issue that involves choosing between single measurement and current mixed measurement models has taken toll in deciding on which to embark on in regards to satisfying decision making needs of users of accounting information. Thus, the aim of this paper is to examine whether measurement of financial statements and other securities will be intensively relevant and reliable whenever they are prepared and presented in accordance with fair values model of under the current mixed measurement approach. It should be understood that a given model, whether mixed or single, used for measuring financial statements should be evaluated in the manner for which it is tailored to meet the immediate objectives of financial reporting (Kusano 142-149). For the purpose of establishing whether single based measurement or mixed measurement model will be effective and relevant, the paper puts up a discussion on the fair value model visa-vis the current mixed model. First, fair- value basis of financial instruments is able to faithfully represent underlying business activities in a reliable manner (Laux & Leuz 827). In order to present and disclose business activities faithfully, it is noted that financial statements depict the nature of different classes of both assets and liabilities as well as the immediate nature of transactions that are undertaken. For this factor, it is determined that fair value of different financial instruments can be used to avail useful forms of accounting information (Laux & Leuz 824). In regards to scenarios where financial instruments are presented using fair value approach, the accounting information presented is considered to be substantial enough for expounding on business activities and performances in order for users to fully comprehend expected future cash flows. Consequently, financial instruments presented and disclosed on the basis of single measurement model like fair values postulate an intensive predictive value in comparison to the historical based costs that have been amortized for all items held for the objective of earning returns through a management that has adopted fair value approach( Eccher, Ramesh & Thiagarajan 79-80). In a business approach where the immediate strategy entails the drawing of benefits from short-term variations in the impending values of financial instruments and in cases where an organizations is deemed to be involved in both the opening and closing of market risk placements, it is considered to be appropriate for these organizations to fair value such aforementioned financial instruments. In this scenario, it is ascertained that any possible cash flows that can be generated will be developed by the immediate prevailing terms and rates on the financial securities market. Thus, the fair value model is considered to depict a fairer reflection of expected future cash flows in comparison to the other model that might involve combination of historical costs (Eccher, Ramesh & Thiagarajan 88-109). Notwithstanding, fair value is able to postulate the capacity of the entity to assume advantage of the presiding opportunities or even react to the such adverse financial conditions as the 2007-2008 Global Financial Crisis (Laux & Leuz 93-111). Therefore, it is depicted as being an appropriate form of measurement for all financial instruments within such aforementioned scenarios. In consequence, as fair value is a single measurement model that fairly suits the reflection of expected future cash flows for all financial instruments under different circumstances, it is also considered to be a relevant form of accounting information for all users of financial statements as postulated under the 2010 IASB Conceptual Framework. Investors are able to rely on the accounting information presented as fair value for purposes of evaluating their immediate expected rate of returns for investments made within given organizations. This is mainly because any alterations experienced within fair value financial instruments that have been managed on fair value model is likely to affect the rate of dividends paid as well as the proper value of investments made. Retrospectively, while management might depict current fair value on current market situations, it cannot be deduced wholly that the information can aid in understanding actual cash flows achieved by engaging in numerous transactions. Thus, many of the users of accounting information in respect to financial statements that depend on earnings information to make decisions will not be served fairly using a full fair value model that only avails fair value forms of information. Second, it is better to establish whether financial statements presented and disclosed on fair value model, unlike in current mixed measurement model, is able to provide a fairer form of communication framework for preparers so that they can avail users with reliable accounting information. It should be understood that financial instruments are prepared to meet the decision-usefulness and accountability objectives. The objective of accountability is deduced from agency theory and thus, it is used to postulate the goals stipulated by investors to the underlying management in order to utilize entrusted capital assets and also, expound on how these resources are managed(Eccher, Ramesh & Thiagarajan 111-118). On the other hand, it is ascertained that transparency objective requires that the accounting information being utilized by the management should be availed to the potential investors and other users of financial information. In cases where portfolios are managed in respect to the amortized costs model and thereby presented to management in that manner, the information that accrues under this single measurement model will likely be relevant in depicting how businesses operate. Third, it is ascertained that fair value measurement model handles the agent-principal relationship in a formidable and distinctive manner. Significant issues that might arise from this form of relationship are associated with both moral risks and adverse levels of selections, which are as result of information asymmetry. Moral based risks arise whenever ex-post behaviors of agents are considered inappropriate. On the contrary, adverse selection arises whenever the principal is not furnished with enough material information about certain traits of the agent (Eccher, Ramesh & Thiagarajan 117). It should be noted that this problem is further enhanced by activities of HCA, which misrepresents real and fundamental economic values by establishing hidden forms of reserves. However, fair value measurement model has been seen to prevent such misrepresentations hence preventing possible damages to the immediate shareholders of an organization. This has been achieved by allowing the shareholders a chance to analyze the end-results of their manager’s decisions in respect to selection and utilization of assets and liabilities for immediate operations, hedging and other fundamental operational activities of the firm. Both the US GAAP and IFRS dictate the importance of fair value model for the purpose of presenting assets and liabilities. However, the same frameworks also stipulate the need for a mixed measurement model that posits items to be reported at fair values and others in accordance with their historical costs. Fundamentally, the mixed measurement model designates the reporting and disclosure of financial items depending on their classifications. For instance, unrealized gains and losses are presented on fair values that might or might not affect the value of net income of a given organization (Cornett & Zabihollah-Rezaee & Tehranian 119-125). Fourth, in order to determine the significance of fair value as a viable single measurement model visa-vis the current mixed model is depended on the assumption that it provides information that is more reliable to users of accounting financial instruments. This is ascertained by the fact that all liquid instruments traded within active market are enhanced by the application of fair value basis. This basis is equalized to the quotation of the market prices for all the financial instruments under trade (Cornett & Zabihollah-Rezaee & Tehranian 130-144). Fifth, financial instruments posited in regards to fair value basis is able to provide substantial amount of information that can aid in influencing relevant decision making processes. This is because users of financial information are allowed access to similar information as the management of a given organization that fairly stipulates expected future cash flows. Thus, it might be argued that fair value model avails a fairer measurement of performance and accountability in comparison to cost based measurement models. This is because fair value depicts entire economic activities that are experienced until the end of a given financial reporting period (Cornett & Zabihollah-Rezaee & Tehranian 143-147). Sixth, unlike the fair value model, the current mixed measurement model is able to reduce possible levels of complexities and thus, enhance a great deal of under-stability. This is ascertained by the fact that fair values would need further complex disclosures that are attributed to given transactional based cash flows. Some of the notable fundamental advantages of the current mixed measurement model rest with the fact that it is fairly established and comprehended. It is also able to reflect on the immediate commercial substance that underlies distinctive business activities and different internal risk managed capacities (Cornett & Zabihollah-Rezaee & Tehranian 150). For instance, financial instruments that are prepared and disclosed using mixed measurement model are entirely comprehendible by users of accounting information that have established sound and deeper financial management activities, which rely on the aforementioned information as a crucial basis for economic decision making processes. Significantly, the current mixed measurement model allows users of accounting information to access risks formulated by entities and also, adopt efficient risk mitigation strategies on transactions. On the other hand, fair value-basis does not allow either the users of accounting information or the management with a fairly placed efficient tool for transparency like the one offered by mixed model (Power 197-208). One of the significant disadvantages of current mixed measurement model in comparison to the fair value basis rests with the fact that it allows easier manipulation of earnings figures by management through such techniques as selective realization of gains or development of excessive provisions. Thus, in my opinion, a fair value model should be adopted to replace the current mixed measurement model since it avails appropriate accounting basis for all financial instruments held for trading purposes or managed. It is also useful since it provides investors with adequate and reliable information in regards to recognition of assets and liabilities. This significantly enhances comprehension of the information to users given that it is not complex. Works Cited Cornett, M.M. & Zabihollah Rezaee, Z. & Tehranian, H. ‘An investigation of capital market reactions to pronouncements on fair value accounting’, Journal of Accounting and Economics, 22 (1996):119-154. p.120 Eccher, A., Ramesh, K. & Thiagarajan, S. R., “Fair value disclosures bank holding companies”, Journal of Accounting and Economics, 22 (1996): 79–117. Financial Accounting Standards Board, Statement of Financial Accounting Standards. (2010). Kusano, M. ‘Does the balance sheet approach improve the usefulness of accounting information’, The Japanese Accounting Review, (2012):139-152, p.144. Laux, C. & Leuz, C. ‘The crisis of fair-value accounting: Making sense of the recent debate’, Accounting, Organizations and Society, 34(2009): 826-834 p.827 Laux, C. & Leuz, C. ‘Did fair-value accounting contribute to the financial crisis?’ Journal of Economic Perspectives, 24.1(2010): 93–118 Power, M. ‘Fair value accounting, financial economics and the transformation of reliability’, Accounting and Business Research, 40.3(2010):197-210. Read More