Forensics Journal - Stevenson University 2014

FORENSICS JOURNAL After the implementation of FAS 157, Fair Value Measurements, many insurance firms and banks criticized fair value accounting standards (Shorter). FAS 157 forced companies to write down their distressed assets when many companies were already experiencing financial hardships. Critics claimed the standard forced holders to write down assets below their true economic value, thus potentially worsening the U.S. economic recession. Conversely, supporters claimed the fair value standards were simply protecting investors because the financial statements reflected the coming financial downturn (Shorter). When implementing fair value, FASB and the SEC experienced a conflict – their duty was to protect investors, but they did not want to add any more failing companies to the struggling economy. tal-European, with investment property and excluded firms that had less than 10% of investment property (Muller, Reidl and Sellhorn). Results of the study indicated that before the IFRS implementation, Scandinavian countries were the primary subjects applying the fair value model (Muller, Reidl and Sellhorn). France and Germany experienced substantial variation in the application of either historical cost or fair value standards (Muller, Reidl and Sellhorn). Ultimately, the majority of the firms that did not provide fair value information were in countries with less effective judicial systems, less tradition for law and order, and higher levels of corruption. The primary reason why companies chose to provide investment property fair values was in response to the greater demand for such information and a commitment to financial transparency (Muller, Reidl and Sellhorn). After the implementation of IFRS, the study failed to find any evidence of a change in information consistency for firm disclosure of fair value (Muller, Reidl and Sellhorn). Also, investors still perceived a lack of consistency in reporting despite the implementation of a universal standard (Muller, Reidl and Sellhorn). These results suggest that implementation is not a definitive solution to the inconsistencies in financial statements across countries. Financial journalists claimed, “By making the banks look so valueless in the middle of a credit crunch, mark-to-market accounting was ‘procyclical’ in that it accelerated the downturn” (“Best of 2008”). Fair value accounting forced banks to devalue their long-term assets; despite the fact that these assets were no longer liquid in nature. It may not be appropriate to value illiquid assets at fair value because it represents the current value of an asset at a given time. While fair value accounting can provide beneficial information to investors when an asset will be sold in the near future, fair value accounting may not be appropriate for assets held for longer terms. Based on the results of the study, the implementation of IFRS standards across European countries did little to resolve the discrepancies in financial reporting. Therefore, if the U.S. was to implement IFRS fair value standards, there would be a risk of inconsistency in financial reporting. At the same time, results still show that fair value reporting supports financial transparency. Therefore, the U.S. could benefit from implementing such a standard because some investors may find fair value information more useful than historical cost information when making investment decisions. EUROPEAN REAL ESTATE REGULATIONS In January of 2005, International Accounting Standards required publicly traded companies within European regulated markets to implement IFRS standards when preparing their financial statements. The Harvard Business School conducted a study that examined the consequences of the implementation (Muller, Reidl and Sellhorn). Before the implementation of IFRS, asset valuation varied across countries in Europe. While the United Kingdom required companies to value their assets based upon the revaluation model, recognizing changes in asset value through equity and not income, other countries could choose between the revaluation model or cost model (Muller, Reidl and Sellhorn). No countries in Europe permitted companies to recognize changes in asset value through income (Muller, Reidl and Sellhorn). IFRS IN GERMANY In 2005, the European Union (EU) required publicly traded firms in Germany to prepare their financial statements based upon IFRS (Liao, Sellhorn and Skaife). By requiring other countries to report their financial statements under IFRS, the EU was encouraging comparability of financial information across the EU’s states. Despite this effort, comparability of financial information can only be achieved when companies report their financial information in the same manner (Liao, Sellhorn and Skaife). When accounting standards allow companies to report transactions based on multiple methods, comparability may be sacrificed. Qing Liao, Thorsten Sellhorn, and Hollis Skaife investigated the comparability of financial information in the EU by comparing the valuation usefulness of earnings and book values (Liao, Sellhorn and Skaife). As noted earlier, IFRS allows companies to choose between reporting their assets at historical cost or fair value, with changes in value recognized through income. To encourage consistency, IFRS requires that companies implement one method for all investment property reported (International Accounting Standards Board). While firms are encouraged to hire independent valuation analysts with relevant qualifications and experience to determine asset values, they are not required to do so (International Accounting Standards Board). By reporting changes in fair value through income as opposed to equity, asset value volatility will affect and possibly distort a company’s reported earning ˂

Forensics Journal - Stevenson University 2014 | Page 40