The company you select should have its equity share capital listed on a stock exchange. It should publish its annual financial statements and annual report in English, and the most recent financial statements and report in English should be accessible on the company’s website. If the company operates in several business sectors.
(a) Give a brief explanation of the concept of fair value and discuss how IFRS 13 Fair Value Measurement sets out guidelines for measuring fair value in practice.
(b) Identify the principal types of non-current (fixed) asset owned by your chosen company (depending on the company chosen, these may be intangibles or tangibles, or both – if there are many different types of non-current asset, restrict your report to the three most significant types of asset).
(c) Discuss the problems that your chosen company is likely to have to deal with in order to measure the fair value of the types of asset you have identified.
(d) Comment on whether the IASB’s approach to fair value measurement is actually practical for companies with non-current assets that are not actively traded on broad and deep markets.
a. A general review of the theoretical justification for fair value measurement is provided by:
Hitz, J.-M. (2007), The decision-usefulness of fair value accounting – a theoretical perspective, European Accounting Review, Vol. 16, No. 2, pp. 323-362.
b. A more critical theoretical view is given by:
Biondi, Y. (2011), The pure logic of accounting: A critique of the fair value revolution, Accounting, Economics, and Law, Vol. 1, No. 1, Art. 7 (available at: http://hal.archives-ouvertes.fr/docs/00/56/18/94/PDF/viewcontent.pdf).
c. There is relatively little literature specifically about non-financial assets and fair value. A paper that supports the use of fair values for property, plant and equipment, but notes problems with the verifiability of fair value measurements for such assets is:
Herrmann, D., Saudagaran, S. M. & Thomas, W. B. (2006), The quality of fair value measures for property, plant, and equipment, Accounting Forum, Vol. 30, No. 1, pp. 43-59.
d. A recent survey of actual reporting practice by UK and German companies, is provided by two researchers at the University of Chicago:
Christensen, H. B. & Nicolaev, V. V. (2011), Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, Vol. 18, No. 3, pp. 734-775.
These researchers suggest that most German and UK companies use historical cost for property, plant and equipment, except for investment properties. Use of fair value as a main measurement method is rare