Accountant and User Perceptions of Fair Value Accounting: Evidence from Fiji

ABSTRACTThis paper through use of proxies for users and preparers of financial reports, finds the definition and understanding of 'fair value accounting', and identifies how it is measured (for shares and property investments) in Fiji. The paper also studies benefits and limitations of the concept, examines its impact on financial reporting roles, determines appropriate alternatives of this method and forecasts its prominence and endurance in Fiji. The paper concludes that users and preparers of financial reports have similar understanding of fair value accounting. Some measurement techniques identified were the use of active markets, independent valuers and referrals to cost. Some benefits identified were better disclosure and information that is more relevant. Proxies also identified limitations of the method in terms of costs of valuation, training and hiring of professionals, and the application of subjective judgment. The proxies predict prominence of fair value accounting in the long run.JEL: M41KEYWORDS: Fair value accounting, measurement techniques, valuation methodINTRODUCTIONThe concept of fair value accounting (FVA) has emerged due to existing limitations of historical cost accounting, major corporate collapses and tremendous pressure from users of financial reports. As a result, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (LASB) are moving away from historical cost accounting towards FVA. The world at large is affected by this move, in one way or another. Despite Fiji being such a small economy (in comparison to USA and Australia), FVA has found its way here as well. Therefore, it is essential to consider 'FVA' in Fiji's context.Firstly, this study (using proxies for users and preparers of financial reports) explores the definition and understanding of 'FVA'. Secondly, it identifies how fair value is measured in an economy with a very small active market (for shares and property investments only). Thirdly, it ascertains the benefits and limitations associated with this accounting phenomenon. Next, it touches on the perceived roles of financial reports and the impact that FVA will have on these roles. Finally, the study considers alternatives of this method and forecasts the prominence and endurance of FVA.LITERATURE REVIEWThe Australian Accounting Standards Board (AASB) Statement of Financial Accounting Standards (SFAS) 157 Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. According to Herz (in Young, 2008), fair value is the price that one would get in a reasonable exchange between knowledgeable parties. The focus is on exit price and not the entry price.However, Zacharski, Rosenblat, Wagner and Teufel (2007) specify that fair value includes market value but is not restricted to situations where current market quotations are available. Accounting standards discuss various ways of measuring fair value. The International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement requires an entity to use the most advantageous active market in measuring the fair value of a financial asset or liability when multiple markets exist, whereas IAS 41 Agriculture requires an entity to use the most relevant market.Both IASB SFAS 157 and FASB SFAS 157, have been developed regarding FVA. These require an entity to use the principal market for the asset or liability. In absence of such, the entity uses the most advantageous market. A principal market is one in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity. The most advantageous market is one in which the reporting entity maximizes amount received for the asset or minimizes amount paid to transfer the liability, considering transaction costs. …