Currently there is a trend to restate the balance sheet, income statement and statement of cash flows. In addition, Financial Accounting Standards Board (FASB) no. 1991 states that the fair market value is the proper way of presenting the financial statements. Likewise, Statement of Financial Accounting Standards (SFAS) no. 119 and FASB no 1994 emphasises that the business entity must prepare the derivatives using fair market values when preparing the balance sheet, income statement and statement of cash flows.
The derivatives include trading in commodities futures as well as option contracts. The stock market in the United Kingdom is basically founded on the market value theory. This is the reason why the prices of shares of stocks in the Stock exchanges are very volatile to unmoving. On the other hand, one of the non -IFRS standard way of financial statement presentation is based on historical cost. Historical cost could also include the fair market value of the asset, liability or shareholders’ equity when the asset was bought in the past.
Historical cost can also be interpreted as the fair market value of the liability at the time that the liability had occurred in the past. Likewise, Historical cost is the fair market value of the stockholders’ equity transaction at the time that the shares of stocks were transacted in the past. However, fair market values could be lower or higher than the historical cost price. Further, financial statements that are presented to the different stakeholders in accordance with International Financial Reporting Standards use fair market value in the preparation of financial statements.
Usually, international accounting standards permit the revaluation of property, plant and equity. This means that the buildings, land, equipment and other large asset investments can be restated using the fair market value at the time of preparation of financial statements. The derivatives are normally measured using fair market value. Derivatives are described as financial instruments that derive their value from the movement in commodity prices, foreign exchange rate and interest rates of an asset or financial instrument.
Derivative contracts can be described as paying a small percentage of the total amount of the asset that will be bought at a later date. This down payment here means that the buyer promises to pay for the entire contract price when the maturity date arrives. However, the investor of these derivatives is generally not interested to waiting for the maturity date. The derivative buyer wants to generate a profit by selling the derivative at a higher price. The hedging of such derivatives can also be recorded using fair market value.
The change in the fair market values of the derivatives can be recorded as recognized profits and loses. The examples of derivatives that are good hedge alternatives include interest rate swap, forward contract, futures contract, option and foreign currency forward contract. On the other hand, the non –IFRS influenced financial statements does not make it a requirement that the derivatives should use fair market value in the preparation of financial statements.
Also, financial statements that are prepared in accordance with International Financial Reporting Standards are always relevant. IFRS standard where the financial statements makes it compulsory for companies to present the balance, income statement and statement of cash flows using the fair market value approach makes the financial reports relevant. For, the fair value amounts of the financial statement items will definitely make a difference in term of decision making.
For, the fair market valued financial statements relevantly will undoubtedly influence the decision makers to invest more money in the business. Also, the fair market value of the financial statements showing that the company has not been doing good for the past year or years of operation will relevantly help the financial statement users to choose to withdraw their remaining investments in a company that has been losing money for the current accounting period as well as the prior accounting years.
For, the fair market value of the items listed in the financial statements will make the investors’ economic decisions relevant. The fair market value is very important in arriving at the earnings per share information. The assets presented that does not use the IFRS standard of preparing financial statements where the fair market value is used would be showing information that does not bear on the decision making activity of the stockholder, manager, customer, creditor, supplier or other very interested parties.
For example, the fair market value of the assets, liabilities and shareholders’ equity is very relevant for a company that is closing down. Relevantly, a or group of person will require the latest derivatives figures, also known as fair market values, that the stock market issues in every stock market session to decide whether to invest in more derivatives like the European dollar or to invest in gold. This same person or a company of persons will beneficially ask the latest market values, also known as fair market value, sell his or her current derivative holdings.