The Power of Fair Value Accounting

It's somewhat a pleasant atmosphere to know that the occasionally at-odds relation (due to competition) between two major accounting bodies in Australia seems to be put aside when furthering the interests of the  accounting profession. If you read on, you'll see why it behooves them to be so for the sake of this more glorious cause.

In a joint letter signed by the CEOs of CPA Australia, ICAA, and NIA, the Joint Accounting Bodies wrote to Kevin Rudd ahead of the Prime Minister's attendance at the US-spearheaded G20 meeting in Washington 14-15 November 2008.

The first key aspect highlighted to the PM is a resounding conviction of the importance and usefulness of fair value accounting as opposed to historical cost method as being asserted by some commentators. Worse, some government leaders are also alleged to point their fingers to fair value measurement as the main culprit to the current market volatility we're experiencing recently.

The heads of these accounting bodies are unanimous, however, in their view that it would "place an unnecessary burden on capital providers to provide capital without having relevant fair value information to make decisions" based on up-to-date situation if everything is valued at their historical values.

In contrast, using fair value for measurement of assets and liabilities will provide more transparency and comparability of the actual state of a company's economic worth. This is despite them acknowledging that copping fair values of some financial assets and derivatives is not always as easy or possible.

The second issue also brought to attention is the need for 'financial reporting' to be segregated from 'prudential reporting' in the context of external reporting. The latter's purpose is to provide decision-useful financial information to the owners of the balance sheet's right hand side, namely investors and lenders (external users). The former's goal is to promote and maintain financial stability even in adverse circumstances, something that chiefly become the concern of the owners of the left hand side of the balance sheet, i.e. the management (internal users).

CPA, ICAA, and NIA wanted to ensure that the financial reporting standards are stringently adhered to cater to the capital providers' needs and, hence, recommended against such modifications as profit stabilisation or creative accounting that will only dress up the performance of the management. Doesn't the term 'prudential reporting' then sound too good to be dubbed  'prudential' in this kind of setting?

 

And lastly, they are also throwing in their firm support for the independence of IASB as the undisputed IAS setter. This is given the unexpected, alleged development that the G20 summit will appoint a new body in place of IASB (hmm, I didn't know that from the media!).

Overall, I am personally wondering whether this sort of deeply technical letter laden with accounting terms would ever attract the attention of our PM. And if it actually was, did the PM really voice these concerns to the world leaders? Once again, I have never read accounting issues ever discussed among them on newspapers. Anyway, what's important to the accounting profession has been done and conveyed properly and clearly to the highest authority in this country. (EJ)

Source: http://cpaupdate.cpaaustralia.com.au/cpalink/1019_31058?Division=New+South+Wales&Segment=The+Rest