Fair value vs Book value; Relevance vs Reliability

The Impact of Standard Setting on Relevance and Reliability of Accounting Information:

Lower of Cost or Market Accounting Reforms in China

Abstract
During the period from 1998 to 2000, China implemented several new asset write-down
regulations that mandate lower of cost or market accounting (LCM) for most non-cash assets.
This is a study of the relevance and reliability of those regulations for investors in China. The
study measures the association of net asset value with market value of equity and the association
of accounting income with stock return, on both a historical cost accounting (HCA) basis and on
an LCM basis. A fixed-effects model controlling both year and firm effects is used in a balanced
panel sample. The panel regressions show high levels of explanatory power. LCM values can be
relevant but may be measured with sufficient error that they do not improve the prediction of
firm values. Reliability is measured using non-nested, overlapping model comparison tests (J and
Cox). The paper also considers whether discretionary motivations influence the amount of writedown. The study supports the relevance of LCM reforms, but finds that reliability is not
increased over HCA during the period under study. Reliability appears to be reduced by the
voluntary nature of LCM provisions during part of the period and by the effects of opportunism
for some firms in the sample.
website: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-646X.2005.00117.x/abstract

Is fair value accounting information relevant and reliable? Evidence from capital market
research
Abstract
In financial reporting, US and international accounting standard-setters have issued several
disclosure and measurement and recognition standards for financial instruments. The purpose of
this paper is to review the extant capital market literature that examines the usefulness of fair
value accounting information to investors. In conducting my review, I highlight findings that are
of interest not just to academic researchers, but also to practitioners and standard setters as they
assess how current fair value standards require modification, and issues future standards need to
address. Taken together, evidence from the research suggests that disclosed and recognised fair
values are informative to investors, but that the level of informativeness is affected by the

amount of measurement error and source of the estimates - management or external appraisers. I
also provide a discussion of implementation issues of determining asset and liability fair values.
Website: http://www.tandfonline.com/doi/abs/10.1080/00014788.2007.9730081

Website : http://pds15.egloos.com/pds/200904/21/25/relevance_and_reliability_tfr_feb_2005.pdf

Why Fair Value Is the Rule

Summary:
For the past two decades, fair value accountingthe practice of measuring assets and liabilities
at estimates of their current valuehas been on the ascent, marking a major departure from the
centuries-old tradition of keeping books at historical cost. Why has this happened? The author,
an associate professor of business administration at Harvard Business School, offers one answer:
The membership of the Financial Accounting Standards Board, which sets the standards for
Generally Accepted Accounting Principles in the United States, has shifted over the decades to
include more people from the financial services industry.
Ramanna offers strong evidence that these executives prefer fair value and several possible
motives for their preference. One, investment banks and asset managers are accustomed to using
fair value in their day-to-day business. Two, GAAP profits defined on the basis of fair value
rather than historical cost accelerate the recognition of gains, particularly in periods of rising
asset prices. Three, the use of fair value to determine impairment of goodwill from M&A activity
may impose less drag on earnings, potentially boosting M&A activitya major revenue source
for investment banks.
https://hbr.org/2013/03/why-fair-value-is-the-rule
Fair Value Accounting vs. Historical Cost Accounting
Paul Jaijairam

Abstract
This paper reviews fair value accounting method relative to historical cost accounting. Although
both methods are widely used by entities in computing their income and financial positions, there
is controversy over superiority. Historical cost accounting reports assets and liabilities at the
initial price they were exchanged for at the time of the transaction. Conversely, fair value

accounting quotes the prevailing price in the market. Nevertheless, while both methods of
accounting affect financial statements, the impact of fair value accounting on the balance sheet
and income statement is extreme due to the potential volatility of the method. Fair value
accounting is deemed superior when compared to historical cost accounting because it reflects
the current situation in the market whereas the later is based on the past. In addition, in relative
terms, fair value accounting provides users with more current financial information and visibility.
http://www.cluteinstitute.com/ojs/index.php/RBIS/article/view/7579

Fair Value Accounting, Historical Cost Accounting, and Systemic Risk

Policy Issues and Options for Strengthening Valuation and Reducing Risk
by Michael D. Greenberg, Eric Helland, Noreen Clancy, James N. Dertouzos
Abstract
Fair value accounting (FVA) refers to the practice of updating the valuation of assets or securities
on a regular basis, ideally by reference to current prices for similar assets or securities
established in the context of a liquid market; historical cost accounting (HCA) instead records
the value of an asset as the price at which it was originally purchased. In the wake of the 2008
financial crisis, conflicting arguments have been made about the contributions of valuation
approaches in triggering the crisis. This report investigates and clarifies the relationship between
these two accounting approaches and risks to the financial system. The authors examine the risk
implications of FVA and HCA in the various situations in which each is used; assess the role that
these accounting approaches have played historically in financial crises, including the 2008
financial crisis, the savings and loan crisis of the 1980s, and the less developed country debt
crisis of the 1970s; and explore insights about systemic risk that can be gleaned from better
understanding the accounting approaches.
The authors find that FVA was probably not a primary driver of the 2008 crisis. Moreover, they
suggest that neither FVA nor HCA is objectively "better" than the other. Instead, both accounting
approaches can provide useful information for different contexts when applied rigorously, but
when they are implemented poorly or when regulatory oversight is weak, both FVA and HCA
can produce misleading information that can increase systemic risk across the financial sector.
The authors conclude with a series of recommendations for how FVA and HCA, and the financial
information that both methods generate, can be improved to better protect against systemic risk
to the banking sector in the future.
http://www.rand.org/pubs/research_reports/RR370.html

http://www.haas.berkeley.edu/rastconference/papers/ChristensenRev.pdf
http://www.virtusinterpress.org/IMG/pdf/Massimo_Costa_Giusy_Guzzo_paper.pdf

The effect of the use of Accounting Information System to the produced financial
information

Influence The Quality of Accounting Information Systems and The Effectiveness of

Internal Control On Financial Reporting Quality
Abstract :
The purpose of this study was to determine influence the accounting information systems and the
effectiveness of internal control on financial reporting quality. The results showed that influence
the accounting information systems and the effectiveness of internal control have a significant
effect on the financial reporting quality. Furthermore it was found that the accounting
information systems and the effectiveness of internal control have relation on financial reporting
quality.
Source: http://www.iiste.org/Journals/index.php/RJFA/article/viewFile/21169/21675
The impact of computerized internal controls adaptation on operating performance
Abstract:
The development and application of information technology makes it possible to automate the
tasks of approving, recording, processing and reporting of transactions. To ensure operational
performance, financial reporting reliability and legal compliance, internal control mechanisms
should be gradually constructed into the information systems, according to the computerization
of the enterprise, in order to continue to exercise the internal controls. Therefore, the main
purpose of this study was to develop a model, in which internal controls adaptability affects
internal controls efficacy and operating performance, and internal controls efficacy influences
operating performance. Research hypotheses derived from the model were tested using
regression analysis on the questionnaire data and financial data from Taiwanese listed
companies. The results showed that not only internal controls adaptability had an impact on
internal controls efficacy and operating performance, but also internal controls efficacy had a
partial influence on operating performance. The research findings could be a theoretical
foundation for further study.
Source: http://www.academicjournals.org/article/article1380557617_Yang%20et%20al.pdf
Impact of accounting information system in internal controls of the company
The usage of Accounting Information Systems for Effective Internal Controls in the Hotels

Abstract
The advancement in technology has enabled companies to generate and use accounting
information systems. When hotels adjust their computerised techniques of internal control
mechanism according to accounting information systems they will be able to ensure the
reliability of financial information processing. Hotels like any other sector need to applythe
accounting information systems to improve the quality of services. The main objective of this
paper is to examine if the usage of Accounting Information Systems (AIS) has improved the
internal control systems in the hotels. A quantitative methodology approach was adopted in this
study. The study revealed that there is a relationship between accounting information systems
and internal controls. AIS has policies, procedures, organizational design and physical barriers
that contribute to the internal control structure. As a result of better internal controls, hotels are
able to achieve their operational goals.

Correlation between Effective Internal Control and Companys Equity

Equity Incentives and Internal Control Weaknesses.
Abstract:
In this study, we examine whether executive equity incentives (broadly defined to include stock
and stock options) influence the quality of internal control. While prior research on the
determinants of internal control quality focuses on firm characteristics and corporate governance
attributes, it is important to investigate the role of executive compensation due to its potential
impact on managements incentives to address internal control issues. We find evidence of a
negative association between equity incentives and the likelihood of a material weakness (MW)
in internal control, supporting the notion that equity ownership provides management incentive
to strengthen the companys internal controls. Further analysis shows that (1) equity incentives
are more effective in reducing company-level control problems; (2) restricted equity provides
greater incentives than unrestricted equity; and (3) CFO incentives have a more significant
impact on the quality of internal control than CEO incentives. These insights have important
implications for compensation committees who make compensation recommendations and the
full board of directors who ratifies those recommendations. They suggest that both the level and
type of equity incentives should be considered in compensation design to motivate managers to
invest in strong internal controls.
Source: http://eds.b.ebscohost.com/eds/detail/detail?sid=d228d6fc-ddb1-4e94-99a44fd466991732%40sessionmgr112&vid=0&hid=111&bdata=JnNpdGU9ZWRzLWxpdmU
%3d#AN=94990199&db=bth
Does Ineffective Internal Control over Financial Reporting affect a Firm's Operations?
Evidence from Firms' Inventory Management.
Abstract:

We investigate whether ineffective internal control over financial reporting has implications for
firm operations by examining the association between inventory-related material weaknesses in
internal control over financial reporting and firms' inventory management. We find that firms
with inventory-related material weaknesses have systematically lower inventory turnover ratios
and are more likely to report inventory impairments relative to firms with effective internal
control over financial reporting. We also find that inventory turnover rates increase for firms that
remediate material weaknesses related to inventory tracking. Remediating firms also experience
increases in sales, gross profit, and operating cash flows. Finally, we assess the generalizability
of our findings by examining all material weaknesses in internal control over financial reporting,
regardless of type, and provide evidence that firms' returns on assets are associated with both
their existence and remediation. Collectively, our findings support the general hypothesis that
internal control over financial reporting has an economically significant effect on firm
operations.
Source: http://eds.b.ebscohost.com/eds/detail/detail?sid=eff838bb-b405-4239-9cd8896c521f2f06%40sessionmgr114&vid=0&hid=111&bdata=JnNpdGU9ZWRzLWxpdmU
%3d#AN=101376186&db=bth

Utilitarian View in Business

Utilitarianism is a normative ethical theory. It is the most well-known and prevalent forms of
consequentialism. Consequentialism is an umbrella term for a range of moral theories that state
the rightness or wrongness of an action should be based solely on the results produced by that
action.
There have been many different forms of theory of a consequentialist nature throughout history.
When modern utilitarianisms most influential exponent, Jeremy Bentham, set out his moral
theory in 1789, it was not an unfamiliar concept.
Website: http://ww2.it.nuigalway.ie/staff/h_melvin/prof_skill/L2_handout.pdf

This article explores the possible convergence between the capabilities approach and
utilitarianism to specify CSR. It defends the idea that this key issue is related to the
anthropological perspective that underpins both theories and demonstrates that a relational
conception of individual freedoms and rights present in both traditions gives adequate criteria for
CSR toward the companys stakeholders. I therefore defend relational capability as a means of
providing a common paradigm, a shared vision of a core component of human development.
This could further lead to a set of indicators aimed at assessing corporate social performance as
the maximization of the relational capability of people impacted by the activities of companies.
In particular, I suggest a way of evaluating the contribution of extractive companies to the

communities close to their industrial sites in extremely poor areas, not from the viewpoint of
material resources and growth, but from the viewpoint of the quality of the social environment
and empowerment.
Website:
http://www.philoma.org/docs/2013_2014_Valeur_actionnariale_a_partagee/Renouard_JBE_2010
_-_CSR_utilitarianism_and_the_capabilities_approach.pdf

Ethics is a branch of philosophy that addresses questions about morality and it is the very
important subject for all people. There are two levels of ethics; theoretical and applied ethics.
Business ethics is one of the important branches of the applied ethics. In this paper, I will try to
discuss some of the major ethical philosophies that are applied to business ethics such as
teleological ethics, utilitarianism, egoism, deontological ethics etc. These ethical philosophies
have their positive and negative sides. The aim of this study is to expose which ethical approach
is appropriated in business. Individual and situational factors are very effective on ethical
decision-making in business. Therefore, it can be concluded that ethics in business is very
complicated.
Website: http://icongfesr2011.tolgaerdogan.net/documents/internatonal_presantations/KIN17.pdf
Within the field of accounting, there never seems to be a lack of conflict between an individuals
morals and the ethical responsibilities an employee has to the company. This paper will
demonstrate many of these ethical conflicts within the field of accounting. It will also
demonstrate how strong leadership and leaders who adhere to strong values and ethical systems
will positively affect the relationship between employees ethical values and the application of
their moral values to the company. A specific ethical dilemma that arises within accounting tends
to be the utilitarian conflict. Since the greater good is accomplished in this system, personal
responsibility and ethics lose importance. The role of utilitarianism and its consideration as the
dominating moral philosophy in accounting practices, along with how Christians in the
accounting field respond to ethical dilemmas, will also be discussed.
Website: http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1281&context=honors