Whereas, using past historical cost is used in the preparation of financial statements would be objective because it does not change as the years move on. For example, the accounts receivable of ? 200 from sale to a customer five years ago will still be the same amount of ? 200 today. This will benefit both the creditor and the debtor. In the same manner, a liability of ? 1,000 three years ago for the purchase of the assets that the company bought like an office table would be the same amount of 1,000 today.
This will surely benefit both the creditor and the customer. Another example is that expenses paid for renting an office two years ago amounting to ? 1,000 and recorded in the financial statements would still remain as ? 1,000 today. This accounting method will be advantageous to both the rent payer and the rent payment receiver. In addition, financial statements that are prepared following International Financial Reporting Standards are use for making better decision.
To explain, International Financial reporting standards require that all important accounting facts that would help the investor and seller in the derivatives market will need both the historical fair market values, usually covering more than a month of stock market transactions to make better decisions. This is the main reason why the fair market values are needed. This is what is known in accounting parlance as the predictive value of accounting data.
For example, the historical list of fair market values of gold showing that price of the United States dollar has been dropping against the European dollar gives the investor in the United States dollar the impression that the United States will continue to go down until it reaches in the bottom of a trend. This bottom will give the derivatives investor the impression that a derivative that reaches the bottom of the trend line could automatically have a very high probability to rise up again.
Also, the fair market values of the current time period plus the fair market values of the past year or years of stock as mandated by the International Financial reporting standards will give better feedback value to the derivatives buyer as well as the derivatives seller. For example, the holder of a derivative stock’s current fair market values will show both the derivative seller and the derivative buyer that his decision to invest in Petroleum is a wise decision because the current prices of gasoline prices are increasing.
The derivatives investor would wish that he will sell his or her investment in petroleum and gain a profit in the future because the future price will probably be higher than the commodities price he pays currently. On the other hand, producing financial statements that use non -fair market values will not be as good as using the fair market values of the derivatives in recording this type of fast –paced and volatile market which describes the derivatives market.
Furthermore, financial statements that are prepared in accordance with International Financial Reporting Standards are more consistent with many accounting bodies. The use of fair market values follows the accounting theory of timeliness. For, using the fair market values of the derivatives would aid the derivatives investor to relevantly make more accurate decisions as to whether he or she will invest more in the Chinese currency or the Japanese currency or in Soy beans. The investor wants the fair market values in order to make timely decisions.
Whereas, not indicating the current fair market values in compliance with the requirement of international financial reporting standards would not fulfill the basic accounting principle of timeliness. The investor who is not given a copy of the current fair market values of the derivatives would have a high probability of making a sell decision because the historical figures show that the price of the United States dollar is climbing when in fact the current fair market value price of the United States dollar is declining.