Fair Value for Financial Instruments

While the valuation bases for balance sheet items are presently rather topical, "non historical" accounting has been used for several years. In fact the following Australian Accounting Standards Board standards makes provision for accounting according to bases other than historical cost. It is no longer sufficient that current values are merely disclosed; an accounting adjustment should also be made. AASB 1019 is the oldest standard that advocates a move away from historical cost accounting, requiring inventory to be valued at the lower of cost or net realisable value.

Additionally, figure 8. 1 in Accounting Theory10, provides a comprehensive list of accounting standards and exposure drafts, listing deviations from historical cost accounting. Therefore despite appearing to be a rather contentious subject at present, the divergence from historical cost accounting has received uniform acceptance and been implemented by accounting bodies around the world for some time. The since the principle has been accepted, it is really the form, adoption and subsequent implementation that still requires work. 


The decision over which accounting valuation basis to use for asset and liability accounting is, and should continue to be based upon the nature of the relevant asset and liability. Preliminary research indicates that this is more likely in high technology industries and organisations in which the public have a stake (i. e. state owned). The means test to be applied is the extent to which it reflects the true value of the asset and/or liability and whether it provides users of financial statements with added value with respect to aiding effective decision-making.

It can therefore be argued that over time, financial statements will be produced by organisations, based on a combination of valuation methods. Caution should be exercised to ensure that a "one size fits all" approach where one doctrine is uniformly applied is avoided. The decision of a valuation basis will be subjective, based upon the nature of the asset and the particular circumstances of the organisation. However, it is important that the evolving accounting standards used should be consistent, allowing for meaningful comparisons and effective decision-making.

This is especially relevant given the globalisation of business. It is important that there should be adequate disclosure in the financial statements of the relevant accounting basis used enabling informed decision-making. Finally, given that the primary purpose of financial statements is to provide users with the tools required for effective decision-making, the more relevant and reliable the data provided, the more effective will be decisions. Appropriate mixed valuations can provide users with meaningful information aiding effective economic decision-making.

The consistent application thereof should avoid the type of high profile financial surprises that have recently become prevalent, (e. g. Enron, Parmelat, etc. ).

Bibliography 1. J Horton & T Macve : "Fair Value for Financial Instruments: How erasing theory is leading to unworkable global accounting standards for performance reporting" published in Australian Accounting Review – Vol. 11, No. 2, 2000. 2. J Godfrey, A Hodgson & S Holmes : Accounting Theory (5th Edition) 3. http://www. frc. org. uk/asb/publications/it8_p62. html