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Accounting Standards of Fair Value Measurement
Accounting standards are rules put in place with either national body or international body for the management accountants to follow during the accounting process (Tucker, 2002, p. 42). Mellemvik (2010, p. 169) has defined the accounting standards as the rules or ethical principles that have been created and enforced with a mandated body either internationally or nationally to define the accounting practices and policies. The fair value is the value that is expected when an asset has been sold or the money paid when a liability is transferred into a common transaction at the measurement date by participants in the market (Adhikari & Mellemvik, 2015, p. 123). Therefore, the fair value measurement is an alternative measurement approach which has the sole purpose of knowing the changes in the value of liability and assets which occur time to time in the market. The measurement of value of assets also needed to be regulated and that is where the accounting standards of fair value measurement comes in. Kuruppu & Matilal (2016, p. 227) define the accounting standards of fair value measurement has the principles that have been put in place to guide how the measurement of the value of assets and liabilities in the market which happen from time to time is done.
Fair vale measurement depends on the up-to-date market value in coming up with the value of liabilities or the assets (Ali, 2018, p. 1). In order to determine the fair value of an asset or liability, the market participants must consider the current prices in the market that is currently active. The fair value measurement is very significant when selling or acquiring a business or company; the participants determine the value of the acquired asset through the market approach. Ball (2014, p. 5) explains that in order for the fair value measurement to take place smoothly in that the participants do not conflict, there must be standards and principles that guide the process and the principles are illustrated in the accounting standards. The accounting standards require the market participants to consider the credit risk when calculating the fair value of asset and liabilities (Tucker, 2002, p. 42).
Bohušová & Blašková (2013, p. 44)defined credit risk as the default risk that arises when a person who borrowed finances has failed to pay the borrowed debts. Ali (2018, p. 1) has further explained that in credit risk, the lender can lose the interests and principal, the collection costs of debts and also increase and lastly the lender’s cash flows can be disrupted. Ball (2014, p. 5) the market participants involved in fair value measurement, when considering the credit risk should calculate the debt valuation adjustments and credit valuation adjustment on their derivatives when measuring fair value. According to Kuruppu & Matilal (2016, p. 227), credit valuation adjustment is the difference between the value of risk free portfolio and the value true portfolio that considers the other parties’ credit default. In other words, the credit valuation adjustment can also be explained as the value of the market of credit risk of the counterparty according to Bohušová & Blašková (2013, p. 44).
The accounting standards have also outlined the ethics and code of conducts the accountants should follow then measuring the fair value of assets and liabilities (Ali, 2018, p. 1). The accountants must always comply with all the procedures that are put in place by the accounting standards body in fair value measurements. One of the policies is that, when measuring the fair value of assets and liabilities, the accountants must refer to the prices of those assets in the current and active market. Kuruppu & Matilal (2016, p. 227), also pointed out another policy that the accounting standards requires the accountants to follow which the credit risk of the person who want to sell the assets. The accounting standards also require the accountants to look at the historical costs of the assets and liabilities when measuring the fair value of those assets. Accounting standards of fair value measurement ensures that there is equality in the process of measuring the fair value of assets and liabilities (Tucker, 2002, p. 42).
Ethics in accounting standards of Fair Value Measurement
The accounting standards have outlined some of the ethics that govern the accountants in measuring the fair values (Adhikari & Mellemvik, 2015, p. 123). The ethics include; accountability- accountants should do the fair value measurement while knowing that they must be accountable for anything that will happen. Second, the accountants should calculate the fair value of assets and liabilities while knowing that they will be responsible for the outcome of the measurements. Third, the accountants must be true and fair while measuring the fair value of assets and liabilities for their clients. The accountants should not temper with the financial report for the fair value measurement to favour one party (Ali, 2018, p. 1). The reports should show true and fair details of the results after fair value measurement. The ethics that are provided for by the accounting standards o fair value measurement help the investors to have accurate information which can help them in making sound investment decisions. The accounting standards of fair value measurement also help the creditors to get the money they lensed before one of the participants sells the assets and liabilities (Tucker, 2002, p. 42).
In conclusion, according to Bohušová & Blašková (2013, p. 44), accounting standards of fair vale measurement are the policies and principles that the accounting bodies have put in place to help the accountants and other stakeholders in conducting the fair value measurement of assets and liabilities. The standards also outline the code of ethics the accountants must follow when helping the investors and the people who want to sell the assets and liabilities. Kuruppu & Matilal (2016, p. 227) have explained that the accounting standards are provided by the bodies that have been given mandate, bodies like the International financial accounting Standards Body who are mandated to regulate accounting of fair value measurement worldwide (Adhikari & Mellemvik, 2015, p. 123).
1. Tucker, R.R., (2002). The influence of accounting standard on a country's economic development. Review of Accounting and Finance, 1(3), pp.42-53.
2. Mellemvik, F., (2010). The adoption of IPSASs’ accounting standards of fair value measurement in South Asia: A comparative study of seven countries. In Research in Accounting in Emerging Economies (pp. 169-199). Emerald Group Publishing Limited.
3. Adhikari, P. and Mellemvik, F., (2015). The concept of accounting standards of fair value. Journal of Accounting in Emerging Economies, 1(2), pp.123-143.
4. Kuruppu, C. and Matilal, S., (2016). Fair Value in Accounting Standards. The journal of Accounting Forum (Vol. 37, No. 3, pp. 213-230). Elsevier.
5. Timoshenko, K. and Gårseth-Nesbakk, L., (2017). The importance of accounting standards to acoountants. International journal of public sector performance management, 2(1), pp.44-60.
5. Ali, M.J., (2018). A synthesis of empirical research on international accounting harmonization and compliance with international financial reporting standards. Journal of Accounting Literature, 24, p.1.
6. Ball, R., (2014). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.
7. Bohušová, H. and Blašková, V., (2013). In what ways are countries which have already adopted IFRS for SMEs different. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(2), pp.37-44