Current Issues in Corporate Governance for Value -myassignmenthelp

Question: Discuss about theCurrent Issues in Corporate Governance for Value. Answer: Introduction The issue presented in the question is that the shift in accounting standards from the historical cost towards fair value has had certain implications. To be more precise the accountant at Bellamys has been assigned with the responsibility of revaluing the rental computer stock. Determination of relevant information Therefore, this study aims to provide an overview into the different approaches (market, income and cost approach) that are required in order to revalue the computers. The strengths and weaknesses of different approaches have been discussed so that the computers are revalued with the help of the best possible fair value accounting method. This is because revaluation of the computers with the most effective valuation method will be beneficial for business (Ettredge, Xu Yi, 2014). Enumeration of the plausible solution Approaches to Fair Value Accounting - Market Approach According to the International Financial Reporting Standards 13, the market approach towards fair value measurement refers to the technique of valuation that utilizes prices and other associated information that are generated by market transactions engaged in business. The respective techniques that are utilized in valuation under the market approach are the market multiple technique and the matrix pricing technique. A market multiple refers to the process of expression of valuation of an asset in terms of its ratio to an operating metric. In case the derivation of the multiples is done from a list of comparable entities, it becomes easy for the accountant to make a choice from the range of calculations based on the market expectations. The factors that are considered while selecting a specific multiple are the qualitative and quantitative aspects of measurement (Strategiimanageriale.ro, 2017). The matrix pricing method is essentially a mathematical technique that estimates the valuation of an asset by with the help of the transaction prices derived from benchmark instruments that have similar features. The advantages of the market approach are that the calculations involved are simple, utilizes real data and the dependence on the subjective forecasts are minimum. The disadvantage of the approach are that the unavailability of the comparable entities, doubt about genuineness of the data and non-flexibility of the approach (Palea, 2014). Cost Approach The cost approach towards fair value measurement refers to the fact that the buyer under no condition will pay an amount for an asset that is more than the cost price required to obtain an asset of equal utility. The cost approach fundamentally is based on the principle of substitution. The principle of substitution states that, other than events like inconvenience or risk the revaluation of an asset should be done at a price that is in no way more than the cost to construct or assemble an asset of equal utility. For instance, the Depreciated Replacement Cost method is a potential example of the cost approach. The Depreciated Replacement Cost method is utilized when the accountant prefers purchasing the alternative asset rather than revaluing the old asset. In such a case, the depreciation adjustments are needed to be included in the alternative assets cost . The cost approach is very easy to understand and comprehend but the only issue regarding the approach is that it is totally dependent on external factors such as demand, supply and other market forces (Strategiimanageriale.ro, 2017). Income Approach The IFRS 13 describes the income approach as that technique of valuation that includes the conversion of the amounts that may arise in the future like expenses and income or cash flows into single current discounted amount. The income approach to fair value measurement essentially depends on the estimated future income and cash flows or profits. The advantages of the income approach are that it is quick and simple; the approach is widely recognized and is also effective in simulating a market price even in the absence of an active market. However, the disadvantage of the income approach is that the approach can be used for the purpose of revaluing the assets that will not result in change in income in the future financial years to come. The income approach also depends on hypothetical projections (Lockwood, 2015). Assessment and Listing of the reasons for making the decision Recommendations Therefore, as it can be understood from the different valuation methods that have been discussed above, the appropriate method that can be used for revaluing the computers would be the cost approach. This is because it would be easy for the accountant to apply the principle of substitution in order to measure the value of the computers with the help of the cost approach. However, cost approach is subjected to different market forces. This makes a particular disadvantage of the approach, but revaluation of the computers would be best done by the cost approach. Self-correction of the decision Conclusion Hence, it can be clearly understood that fair value accounting has much more advantages than historical cost accounting provided that the correct approach is applied while revaluing assets or other financial instruments. In the case presented in this particular study the cost approach would be best suitable. However, every decision-making process has its own limitation. Therefore, it is much dependent on the accountant to make the final decision regarding the revaluation. The situation is the sole decision maker and the accountant may also decide to substitute the cost approach with the income approach as the situations of the case may be. References (2017). Strategiimanageriale.ro. Retrieved 19 November 2017, from https://www.strategiimanageriale.ro/papers/130512.pdf Ettredge, M. L., Xu, Y., Yi, H. S. (2014). Fair value measurements and audit fees: Evidence from the banking industry. Auditing: A Journal of Practice Theory, 33(3), 33-58. Lockwood, A. (2015). There's no containing water asset valuation methodologies. Water: Journal of the Australian Water Association, 42(3), 36. Palea, V. (2014). Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2), 102-116.