Financial Reporting and Management

Task 1

1.1 Valuation techniques as per IASB in respect of financial reporting and international reporting standards

The International Accounting Standard Board (IASB) is a private institution which deals in development and various other improvement of standards made for financial reporting i.e. International Financial Reporting Standards. Its main work is to oversight the IFRS in order to make the statements of finance more reliable and more credible so that healthier presentation can be made in front of its users.

IFRS 13 Fair Value Measurement

This standard of of IFRS has been issued by international accounting standard board of 12th day of May 2011 in which the use of fair market in the valuation of assets of any enterprise has been mentioned so that they can value them on that amount which they can get as proceeds of such fixed as well as current assets on selling them in open market. There are various other objectives which are behind issuing such standards. And these are described below...

• Defining the fair value of any asset so that they can put that amount as their value which they can get through selling them in open market.
• For providing a single set of requirement for the measurement of techniques so that they can increase the scope of exclusions of such elements which can make a unethical fluctuation.
• To specifically describe the single set of requirements for the measurement of market valuation.

IFRS 13 do not contain those specific criteria in which it has been mentioned that when such assets of any entity should be valued of market value. As these criteria are described in some other standards.

On the other hand there are some particular IFRS which specify some assets which should valued only at fair market value(Armstrong, Guay and Weber, 2010). Which can be measured on each reporting date, means that they should value such assets on each date so that they can get the amount of asset on which they can get as sale proceed on selling them on same date. In some other cases such as alteration in assets it can be possible that these are quantify on recurring basis.

The above mentioned standard can be applied on the assets which meets the specific criteria which have been mentioned there in other standards as well as to those assets in which some assets are specifically described. IFRS 13 can be applied on both financial and non financial data which are there in transaction of any company but these are guided through limited scope exclusion(Barth and Landsman, 2010). This provides guidance which is purely based on principle which are scientifically approved and universally accepted as through following these principle based guidance of IFRS 13 an entity can easily and effectively quantify its available possessions. It does not attempt to exclude any judgement which is their in valuation as every enterprise can adopt their different and realistic methods of valuation. Rather than this it mention the framework through which it can remove the inconsistency which is their in quantifying the possessions of entity. It can also enhance the comparison capability during fairly quantification measurements. Standard remains effective during the whole financial year so that their can be consistency in measurement as early adoption of such methods will continue till end.

Scope exclusions

There are certain scope exclusions are mentioned there in IFRS 13, which are mentioned as under.

Share based payments

There are certain assets amount of which are required to be paid on the basis of shares. IFRS 2 deals in such share based valuation it can be noted here that the objectives of IFRS 2 is entirely different and inconsistent with International financial reporting standard 13. so IASB has separated such share based payment assets out of the scope of this standard.

Lease transactions

Certain assets are not owned by the company as management may decide to lease such assets rather than to own them as this can reduce the huge expenditure over the asset and further there is an another benefit available with them and that is they can easily return such asset which has been taken on lease to the lessor. As IFRS 13 does not apply on transactions which have been made through leasing agreement.

There are some other measurement techniques which are described as below :

Present Value technique

This standard provide a better guidance for using present value during the process of quantifying the assets held by any company. Company can use discounted cash flow techniques in which cash flow from assets is multiplied with discounting factors to get the amount which can be derived in present period. However it is not always possible to get the fair market amount through applying present value techniques. As some standards use this technique when they are not intended to value asset at fair market value.

1.2 Discussion over the reliability of using fair value techniques

If an enterprise is following IFRS and then they should be acknowledged of the facts which are like whether the measurement done by by cited entity presents the actual amount which can be acquired from the buyers of such assets through selling them in open market.

As present value techniques defines that the assets should be valued by applying present value or discounting factors over the cash flow which can be generated through sale of such possessions. As some other standards are using this technique but not to value the assets on market price(Charles, Glover and Sharp, 2010). As fair market value as per IFRS 13 means the value which can be get through sell of asset and transfer of liability in some transactions which is can be done between any firm and market participants as on the date of measurement.

Exit price and transactions price are two different terms as the concept behind these two terms are entirely different. As entry price and exit price can be on the same level and at the same amount but transaction price has a different concept as this will not fetch the value of any possession and liability in market.

The value which can be derived through sale proceed can be helpful for any entity to record the exact amount which they can receive through sell of such possession and transfer of any liability. As historical cost is that cost at which the entity has purchased such asset from the vendor and in case they will use such historical value in decision making then it will lead to the wrong interpretation of data and miss guidance in decision making process of any entity. Hence they should use fair market value rather than using historical value of asset. Because of the factor numerical quantity of any possession decreases due to to its regular use operating business activity. Depreciation factor is not there in historical value as it specifically ignore depreciation but as per standards issued by IASB it is mandatory to provide depreciation over the items classified as fixed assets and used in operating activities of business. If any firm does not provide depreciation through straight line method, diminishing value method or any other methods mentioned there is IFRS. For taking better decisions it is very important to consider the present by comparing it with past and to assess the future through it. And in this process present value of any possession can be helpful as it can provide better techniques and productive methods through which the entity can make efficient decisions in terms to achieve the objectives which have decided by them earlier.

1.3 Disclosure requirements as per international reporting standards which governs the use of Fair market value

There are some disclosure requirements which are mentioned there in IFRS 13 and these requirement are mandatory to comply with as the ignorance of such disclosure requirements would lead to not following the standards as per the guidelines which are necessary to follow. And such guidelines related to disclosure requirements and objectives behind such disclosure requirements which are provided by IASB are as following:

Objectives of Disclosure requirements

• The assets and liabilities which are valued at market price through recurring and non recurring basis in the statements of finance, after the earlier and recognition at the beginning to develop the techniques which are utilized for the valuation.
• For recurring fair valuation and its measurement techniques and to implement unobservable inputs so that thy can make impact over the income statement and the surplus or deficit which is opted from such statements.
• For the achievement of these objective entity requires to satisfy the level of details which is exclusively required to meet the objectives of disclosure. They should also assess that how much emphasis is to be given on each and every requirements. Entity should also get acknowledged of the accumulation and dis accumulation which requires to be undertaken by such entity which have to follow international financial reporting frame work so that they can present exact position of entity. These objectives are to be followed so that they can ensure that whether the stakeholders like employees, shareholders, society and government etc. are demanding for some more information so that they can evaluate the quantified data.

Types of disclosure

Disclosure for recognised fair market value measurement

• In case of recurring and non recurring market price criterion fair price at the terminal point of financial year and in case of non revenant market value criterion reason should be disclosed properly.
• Assets which are valued on the terminal point of year the transfer of assets and liability between level one and level two of their fair value hierarchy then the transfer date and reasons behind such transfers should be mentioned separately.

Disclosures for unrecognised fair value measurements

• Disclosure should be made in a proper way if the organisation has made pricing of assets and liabilities through any unrecognised method then such method should be disclosed very specifically.
• Further the method which are used by managers and accountants of enterprise on which IFRS 13 applies, should exclusively mention only those methods which are universally accepted and they are scientifically approved.

Disclosures regarding liabilities issued with an inseparable third-party credit enhancement

• If any liability which has been measured at fare value and is issued through a third party credit enhancement then such issuer requires to disclose such fact that liability is attached with third party credit enhancement(Iatridis, 2010). And such fact should be reflected in the market price or fair value of that specific liability.
• An extra disclosure is also required if such a liability is attached with inseparable third party credit enhancement.

Task 2

2.1 Discuss the key definition of term used in clarifying the difference between debt and equity

International financial reporting standard 9 has been issued by IASB which is privately owned and managed institute which in fact deals with the development of standards which can act as guide in reporting of financial statements. This particular standard is specified for financial instruments and it deals with the concepts and facts which are related with such instruments. It mainly consist three topics which are as follow :

• Measurement of financial instruments as well as their classification.
• Impairment of those assets which are related with finance.
• Hedge accounting.

The above mentioned standard will replace IAS 39 when it gets into existence in year 2018. Enterprises on which this standard is applicable for them it is mandatory to comply with such standard as through its guidelines accountants of entities can make exact calculation regarding the financial instruments which they have.

The term debt and equity is the financial instrument which includes the financial liabilities, assets and many other instruments. It is an agreement which has risen from one organisation to another organisation and has given them financial liabilities or equities. Their objective is to create some principles to tell them how to present financial instrument as debt and equity and how to balance financial assets and liabilities. When these instrument are issued by an entity it shows them the difference between debt and equity.

These shows that it determines spontaneous and a perfect effect on the entity's results which are being reported and even their financial position. But equity ignores such impacts but it may give negative impact on investors if it is seen reducing existing equity interests. It includes financial assets, liabilities and equity instrument which depends upon the variability which may be in number of equity shares which are being delivered or changes in the amount of financial assets or cash that are received(Labelle, Gargouri and Francoeur, 2010). These financial instruments are classified as liability or as equity on the basis of substance which are over form. Some instrument are being formed with intentions to achieve tax, accounting or any regulatory sources. With the impact that they have evaluated substance which are difficult. IAS 32 need an entity to balance all the financial instruments like assets, liabilities and equities in the affirmation of financial position only when these entities has a right of legal enforcement to balance or settle their net assets and liabilities simultaneously(Li, 2010). These instrument are made and are being structured to maintain all the element of both equities and liabilities in single instrument.

Difference between debt and equity

Debt and equity are formed to contain some element of both in a single instrument. It is not solely an equity instrument which may result in receipt of an entity's equity instrument, it depends on variability of number of equity share which includes financial instruments. An equity is a contract which is settled by entities who are receiving or delivering a fixed number of their own equity or financial assets as application . Sometime both debt and equity contains an element which are in single instrument, e.g. bonds which are convertible into equity shares and carry interest are addressed as equity components and separate liability(Maditinos and et. al., 2011). These liability components are measured as fair value at equal liability which do not have any conversion option. Equity in any contract can determine interest in any entity after redeeming all the liabilities. The debt are mainly for issuing or delivering either financial asset or cash of the holder. This are the written agreements which are responsible, and require to repay interest dividends or principal. Such requirement occur indirectly but only through or in terms of agreement. These debts requires to make interest payments and lesser the bond for cash as debt. Financial instruments are equity instrument only when it includes no agreements to deliver cash or any financial instruments or assets to any other entity.

2.2 Discussion over the key characteristics or the criteria which are used to make differentiation between debt and equity

Under IAS 32 there are some criteria available which can used by any user to make any differentiation between debt and equity. As debts are the in fact the liabilities of the company which are related with the outsiders but on the other hand equity consist of that amount which is used by any enterprise for carrying out its activities.

• It is the contract which provides evidence of some residual interest which are covered in any asset of cited entity after making deduction of all other outsider liabilities.
• There are some financial instruments which are described in IAS 32 as puttable instruments which have to be put back to the person who have issued such instruments or any other financial instrument which have been put back to the issuer when any uncertain future event occurs such as death or retirement of the person who is holding the financial instrument.

Differentiation between equity and liability as per IAS 32

There is a basic principle that financial instruments must be differentiated in some categories. They should be classified either as a liability which is related with finance or as an equity instrument as per the conditions of the contract signed between the enterprise and holder of that equity or liability. There are some exceptions to this prominent principle i.e. puttable instruments which are as per the specific measures mentioned there in agreement between the parties . Enterprises should maintain such decision at beginning time when such instrument has been recognised by the managers but such classification should not be changed later on which are based on changes in situation or circumstances. Equity consists of amount of equity shares and preference shares, retained earnings of company etc. on the other hand debt consists of outsiders liability such as loan, debentures and tax liability.

2.3 Discuss over the issues which recognises convoluted financial instruments present in financial instruments.

There are some issues which can assist the users or stakeholders which can recognise convoluted instruments of finance which are there in financial statements of any enterprise:

Preference shares

These are the shares which have preferential right over the dividend of the company. Only a company form of organisation can issue shares as per the rules mentioned in companies act(Steve’s guide to complex financial instruments. 2017). They doesn't carry the voting rights, as the preference share holders cannot vote against or in favour of any agenda which is there in shareholders meeting.

Equity shares

This type of shares possess the preferential right in shareholders meeting as they can vote in favour or in against of any agenda(Feng and et. al., 2014). There is a issue which is equity shareholders possess more risk as it is not confirmed to them that weather they will get the dividend or not.

Debentures

They are such debt instruments through which any business enterprise can raise funds from outsiders. They carries some fixed charges and it may be possible that they have been secured with some fixed assets.

These are the characteristics or issues which can assist the user of financial statement to recognise the financial instruments.

Conclusion

As per the concepts mentioned therein the report which consists that, The International Accounting Standard Board has issued some guidelines through International Financial Reporting Standards through which the users of financial statements or financials can evaluate its elements in a better way so that they can frame a healthier and effective decision through which they can invest in right instruments of finance. Presented issue was whether to use historical value or to work as per fair market value of any asset or liability contained in statements has been resolved through defining the importance of fair value in decision making through following guidelines of IFRS 13.

References

• Agoglia, C. P., Doupnik, T. S. and Tsakumis, G. T., 2011. Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The accounting review.
• Altamuro, J. and Beatty, A., 2010. How does internal control regulation affect financial reporting?. Journal of Accounting and Economics.
• Armstrong, C. S., Guay, W. R. and Weber, J. P., 2010. The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics.
• Barth, M. E. and Landsman, W. R., 2010. How did financial reporting contribute to the financial crisis?. European accounting review.

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