EXAMThe following article strongly

EXAM
The following article strongly criticizes the notion of fair values and the
measurement of financial assets under IAS 39/AASB 139.


Fair value or false accounting
by Anthony Rayman

Forget Enron; forget WorldCom; forget Parmalat. Dishonest accounting can do enormous damage – but nowhere near as much as the honest variety.
‘Fair value accounting’ is the most recent example. The title sounds wonderful, but its promotion by the International Accounting Standards Board
(IASB) threatens to bring the profession into even greater disrepute by
institutionalizing false accounting on a global scale.
According to IAS 139, Financial Instruments: Recognition and Measurement, financial instruments are to be stated at their ‘fair value’ – defined as ‘the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction’.
‘If the market for a financial instrument is not active, an entity establishes a fair value by using a valuation technique…[including] discounted cash flow analysis and option pricing models’, says IAS 39. ‘A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be recognized in profit or loss.’
As far as financial instruments are concerned, fair value accounting is notable for its closeness to the long-cherished academic ideal of ‘income as present value growth.’
What possible objection can there be to fair value accounting? On the face of it, IAS 39 looks like a passport to the promised land of ‘truth and fairness of
view’.
Before leaping on to this particular bandwagon, however, it may be a good idea to try it out on a test track – an economic utopia of perfectly competitive markets.
The beauty of an economic utopia is that it provides the most favorable conditions for fair value accounting: the change in recorded equity based on ‘fair value’ coincides with the academic ideal of ‘present value growth’ as a measure of economic performance.


A cautionary tale
With the (perfect) market rate of interest at 8% per annum, the Fair Value
Company invests the whole of its investors’ capital of £100 m in ‘financial instruments’. These are various equity shareholdings with expected cash dividends totaling £8 m pa. The company has no other assets or liabilities.
Suppose an ‘event’ occurs – perhaps fear of a previously unexpected economic recession. Suppose this event causes (1) the market expectation of the
annual dividends to be revised downwards to £5.5 m and (2) the monetary authority to lower the rate of interest to 5% pa. As a consequence, the market value of the company’s financial instruments rises from [£8 m/0.08=] £100 m to [£5.5 m/0.05=] £110 m.
The £10 m increase in the ‘fair value’ of the company’s ‘financial instruments’ is based on observable market prices. According to IAS 39, it is to be
reported as a ‘gain’.
Since these financial instruments are the whole of the company’s net assets, the market value of the company’s share capital also rises from £100 m to £110 m. Investors in the Fair Value Company therefore have the opportunity of selling their shares and spending £10 m more than before.
From every point of view, it looks like an open and shut case in favor of
IAS 39 and reporting a gain of £10 m – but appearances can be deceptive.
Only if investors actually take the opportunity of realizing the market value and spending it immediately, are they able to spend £10 m more than they could before the ‘event’. If they save for one year before actually spending, the extra
spending made possible by the ‘event’ is only £7.5 m; and the equivalent present
sum (at 5% pa) at the balance sheet date is £7.1 m.
The effect of the ‘event’ on investors depends on how long they choose to
save.


For investors intending to save for more than just over 31/2 years, the effect
of the fall in the rate of interest from 8% pa to 5% pa outweighs the initial increase
in ‘fair value’. If all the investors intend to save for eight years, the ‘event’ reduces the amount available for spending by £22.6 m. To cover this shortfall, the compensation that would be required at the balance sheet date (in order to accumulate at 5% pa for eight years) amounts to no less than £15.3 m.
If the consequence of the ‘event’ is £300,000 worse than being robbed of
£15 m, is it ‘true and fair’ to report a gain of £10 m? Or is it fraudulent mis- representation?
It is certainly mis-representation, and it can be massive; but is it no intentional. The belief in the relevance of ‘value change’ as a measure of financial
performance is the result of a fallacy deeply entrenched in the conventional academic wisdom.

The present value fallacy
At any given moment, a higher market value is unquestionably preferable to a lower market value. Irrespective of subjective preferences, £110 m will (through borrowing or lending) support a higher level of spending of any chosen pattern than will £100 m. But, as the table demonstrates, this is not always true of sums available at different moments. That is why it does not necessarily follow that a
£10 m increase in market value over a period represents a gain. The fallacy underlying the IASB’s standard on fair value accounting lies in following the conventional wisdom and assuming that it does.
The tale of the Fair Value Company is simply one particular example of the
‘present-value fallacy’. But, because it takes place on the test-track of an economic utopia, it is sufficient to demonstrate that the academic ideal is false and that growth in present value (= ‘fair’ market value) is not reliable as a measure of economic performance.
(For readers with the patience to endure a spot of general economic equilibrium analysis complete with Fisher diagrams, a rigorous proof is available in the author’s book on accounting reform: Accounting Standards: True or False? London: Routledge, 2006.)

The accounting implications
The moral of the story is that there is nothing wrong with fair values in the balance sheet; there is everything wrong with fair value changes in the profit and loss
account.
In a balance sheet intended to present a ‘true and fair view’ of a firm’s financial position, the disclosure of fair values is a development to be welcomed – as an indication of the available market opportunities. On the balance sheet of the Fair Value Company after the ‘event’, no figure has a greater claim to relevance as a measure of the net assets than their fair value of £110 m.
But opportunities are not the same as actual transactions. The very fact that an item appears in a balance sheet, means that by definition it has not been exchanged. Its ‘fair’ market value represents a rejected opportunity.
The fundamental mistake is to report ‘value change’ as a ‘gain or loss’. For
‘value change’ may simply be the difference between hypothetical opportunities that have actually been discarded. What is in question, therefore, is the relevance
of fair value for reporting financial performance.
An accounting standard which generates a fair value ‘gain’ of £10 m in response to a fall in the expected annual returns from the Fair Value Company’s net assets from £8 m to £5.5 m does not inspire confidence. The ‘event’ is responsible for an increase in fair value of the company’s net assets from £100 m to £110 m. A gain of £10 m is a ‘true and fair view’ of the result on one assumption only: that the fair value is realized and actually consumed at the balance sheet date. The most common reason for investing, however, is to save for the future. Of all the assumptions that could have been chosen, immediate consumption is the least likely. It is ruled out almost by definition.
Many savers and pensioners in the UK have become materially worse off as a direct consequence of events that would be reported in ‘fair value’ accounts as substantial ‘gains’. The propagation of the market value fallacy has made a substantial contribution to the housing bubble and the pensions crisis.

Truth in accounting?
As a result of the ‘event’, the rate of return on investment in the Fair Value
Company has fallen from 8 % pa to 51/2 % pa. IAS 39 requires the accounts to
report a gain of £10 m equal to 10% on capital. This is in clear breach of English criminal law: ‘Where a person…in furnishing information for any purpose produces…any account…which to his knowledge is or may be misleading, false or deceptive in a material particular; he shall, on conviction on indictment, be liable to imprisonment for a term not exceeding seven years’ (s17, Theft Act 1968).
IAS 139 is calculated to bring the profession into disrepute. But who is really responsible – those who do their best to operate, with honesty and integrity, in accordance with the standards – or the IASB which sets them?
Source: Excerpts from Accountancy, October 2004, pp. 82-3.


Questions
1. How are assets and liabilities measured under IAS 139?
2. What impact according to the author, will fair value accounting have on the balance sheet and income statement?
3. What measurement requirement of historical cost accounting is violated?
4. Is a change in asset value an increase in wealth or income? Are they the same?
5. What do you think about fundamental value in accounting should be? Refer to the debate regarding value in use and value in exchange outlined in this chapter
when answering this question.

Kết quả (Tiếng Indonesia) 1:

UJIANArtikel berikut sangat mengkritik gagasan tentang nilai-nilai yang adil danpengukuran aset keuangan di bawah IAS 39/AASB 139.Nilai wajar atau palsu akuntansioleh Anthony RaymanLupa Enron; lupa WorldCom; lupa Parmalat. Akuntansi jujur dapat melakukan kerusakan besar – tapi tempat dekat sebanyak berbagai jujur.'Nilai wajar akuntansi' adalah contoh terbaru. Judul Kedengarannya indah, tapi promosi oleh Dewan standar akuntansi internasional(IASB) mengancam untuk membawa profesi menjadi lebih buruk olehmelembagakan palsu akuntansi pada skala global.Menurut IAS 139, instrumen keuangan: pengenalan dan pengukuran, instrumen keuangan yang harus dinyatakan di 'adil nilai mereka'-didefinisikan sebagai ' jumlah yang bisa ditukar aset atau kewajiban menetap,antara pihak-pihak yang berpengetahuan dan bersedia di lengan panjang transaksi '.' Jika pasar untuk instrumen keuangan tidak aktif, suatu entitas menetapkan nilai wajar dengan menggunakan teknik penilaian...[termasuk] analisis arus kas diskon dan pilihan harga model, kata IAS 39. 'Keuntungan atau kerugian pada aset keuangan atau kewajiban keuangan diklasifikasikan sebagai pada nilai wajar melalui profit atau loss akan diakui di profit atau loss.'Sejauh sebagai instrumen keuangan yang bersangkutan, nilai wajar Akuntansi sangat terkenal karena kedekatan dengan ideal dihargai panjang akademik 'pendapatan sebagai hadir pertumbuhan nilai.'Apa keberatan mungkin bisa ada nilai wajar akuntansi? Wajah itu, IAS 39 tampak seperti paspor untuk tanah perjanjian ' kebenaran dan keadilan dariLihat '.Sebelum melompat ke kereta musik tertentu ini, bagaimanapun, mungkin ide yang baik untuk mencobanya di trek tes-utopia ekonomi pasar yang sangat kompetitif.Keindahan utopia ekonomi adalah bahwa ia menyediakan kondisi yang paling menguntungkan untuk nilai wajar akuntansi: perubahan ekuitas yang tercatat berdasarkan 'adil nilai' bertepatan dengan ideal akademik 'hadir nilai pertumbuhan' sebagai ukuran kinerja ekonomi.Kisah peringatanDengan tingkat (secara sempurna) pasar bunga di 8% per tahun, nilaiPerusahaan menginvestasikan seluruh ibukota para investor dari £100 m di 'instrumen keuangan'. Berikut adalah berbagai pemegang saham ekuitas dengan dividen tunai diharapkan senilai £8 m pa. Perusahaan ini memiliki aset atau kewajiban lainnya tidak ada.Misalnya 'peristiwa' terjadi-mungkin takut resesi ekonomi yang tak terduga sebelumnya. Misalnya, acara ini menyebabkan (1) harapan pasar tahunan dividen harus direvisi ke bawah untuk £5.5 m dan (2) para neter otoritas untuk menurunkan suku bunga ke 5% pa. Sebagai akibatnya, nilai pasar instrumen keuangan perusahaan naik dari [£8 m / 0,08 =] £100 m untuk [£5.5 m / 0.05 =] £110 m.Peningkatan £10 m 'nilai adil' perusahaan 'instrumen keuangan' didasarkan pada harga pasar yang diamati. Menurut IAS 39, itu adalah untuk menjadidilaporkan sebagai 'keuntungan'.Karena instrumen keuangan seluruh aset net perusahaan, nilai pasar modal saham Perseroan juga naik dari £100 m untuk £110 m. investor di perusahaan nilai adil karena itu memiliki kesempatan untuk menjual saham mereka dan menghabiskan £10 m lebih dari sebelumnya.Dari setiap sudut pandang, itu tampak seperti terbuka dan menutup kasus mendukungIAS 39 dan melaporkan keuntungan sebesar £10 m – tetapi penampilan dapat menipu.Hanya jika investor benar-benar mengambil kesempatan untuk menyadari nilai pasar dan menghabiskannya dengan segera, mereka bisa menghabiskan £10 m lebih daripada mereka sebelum 'event' bisa. Jika mereka menyimpan satu tahun sebelum benar-benar menghabiskan, tambahanmenghabiskan dimungkinkan oleh 'event' adalah hanya £7.5 m; dan kini setaraSum (di 5% pa) pada tanggal neraca adalah £7.1 m.Efek 'event' pada investor tergantung berapa lama mereka memilih untuk Simpan. Bagi investor yang berniat untuk menyimpan selama lebih dari hanya lebih dari 31/2 tahun, efek musim gugur di bunga dari pa 8% sampai 5% pa melebihi peningkatan awaldalam 'adil nilai'. Jika semua investor berniat untuk menyimpan selama delapan tahun, 'event' mengurangi jumlah yang tersedia untuk pengeluaran oleh £22.6 m. Untuk menutupi kekurangan ini, kompensasi yang akan diperlukan pada tanggal neraca (untuk mengumpulkan di 5% pa selama delapan tahun) jumlah dengan tidak kurang dari £15.3 m.If the consequence of the ‘event’ is £300,000 worse than being robbed of£15 m, is it ‘true and fair’ to report a gain of £10 m? Or is it fraudulent mis- representation?It is certainly mis-representation, and it can be massive; but is it no intentional. The belief in the relevance of ‘value change’ as a measure of financialperformance is the result of a fallacy deeply entrenched in the conventional academic wisdom.The present value fallacyAt any given moment, a higher market value is unquestionably preferable to a lower market value. Irrespective of subjective preferences, £110 m will (through borrowing or lending) support a higher level of spending of any chosen pattern than will £100 m. But, as the table demonstrates, this is not always true of sums available at different moments. That is why it does not necessarily follow that a£10 m increase in market value over a period represents a gain. The fallacy underlying the IASB’s standard on fair value accounting lies in following the conventional wisdom and assuming that it does. The tale of the Fair Value Company is simply one particular example of the‘present-value fallacy’. But, because it takes place on the test-track of an economic utopia, it is sufficient to demonstrate that the academic ideal is false and that growth in present value (= ‘fair’ market value) is not reliable as a measure of economic performance.(For readers with the patience to endure a spot of general economic equilibrium analysis complete with Fisher diagrams, a rigorous proof is available in the author’s book on accounting reform: Accounting Standards: True or False? London: Routledge, 2006.)The accounting implicationsThe moral of the story is that there is nothing wrong with fair values in the balance sheet; there is everything wrong with fair value changes in the profit and lossaccount.In a balance sheet intended to present a ‘true and fair view’ of a firm’s financial position, the disclosure of fair values is a development to be welcomed – as an indication of the available market opportunities. On the balance sheet of the Fair Value Company after the ‘event’, no figure has a greater claim to relevance as a measure of the net assets than their fair value of £110 m.But opportunities are not the same as actual transactions. The very fact that an item appears in a balance sheet, means that by definition it has not been exchanged. Its ‘fair’ market value represents a rejected opportunity.The fundamental mistake is to report ‘value change’ as a ‘gain or loss’. For‘value change’ may simply be the difference between hypothetical opportunities that have actually been discarded. What is in question, therefore, is the relevanceof fair value for reporting financial performance.An accounting standard which generates a fair value ‘gain’ of £10 m in response to a fall in the expected annual returns from the Fair Value Company’s net assets from £8 m to £5.5 m does not inspire confidence. The ‘event’ is responsible for an increase in fair value of the company’s net assets from £100 m to £110 m. A gain of £10 m is a ‘true and fair view’ of the result on one assumption only: that the fair value is realized and actually consumed at the balance sheet date. The most common reason for investing, however, is to save for the future. Of all the assumptions that could have been chosen, immediate consumption is the least likely. It is ruled out almost by definition.Many savers and pensioners in the UK have become materially worse off as a direct consequence of events that would be reported in ‘fair value’ accounts as substantial ‘gains’. The propagation of the market value fallacy has made a substantial contribution to the housing bubble and the pensions crisis.Truth in accounting?As a result of the ‘event’, the rate of return on investment in the Fair ValueCompany has fallen from 8 % pa to 51/2 % pa. IAS 39 requires the accounts to laporan keuntungan dari £10 m setara dengan 10% pada modal. Hal ini jelas melanggar hukum pidana Inggris: ' mana seseorang... di furnishing informasi untuk tujuan menghasilkan... rekening... yang kepada pengetahuan atau mungkin menyesatkan, palsu atau menipu dalam bahan tertentu; Dia, keyakinan pada surat dakwaan, akan bertanggung jawab kepada penjara karena istilah yang tidak melebihi tujuh tahun (s17, pencurian Act 1968).IAS 139 dihitung untuk membawa profesi menjadi buruk. Tapi siapa benar-benar bertanggung jawab-mereka yang melakukan yang terbaik untuk beroperasi, dengan kejujuran dan integritas, sesuai dengan standar – atau IASB yang menetapkan mereka?Sumber: Kutipan dari akuntansi, Oktober 2004, halaman 82-3.Pertanyaan1. Bagaimana aset dan kewajiban diukur di bawah IAS 139?2. apa dampak menurut penulis, akan nilai wajar akuntansi memiliki pada neraca dan laporan laba rugi?3. apa persyaratan pengukuran sejarah akuntansi biaya yang dilanggar?4. Apakah perubahan dalam nilai aset peningkatan kekayaan atau pendapatan? Apakah mereka sama?5. apa yang Anda pikirkan tentang nilai dasar akuntansi harus? Merujuk kepada perdebatan mengenai nilai dalam penggunaan dan nilai dalam pertukaran yang diuraikan dalam bab iniketika menjawab pertanyaan ini.