Research On Fair Value Measurement

First, historical cost measurement and current cost measurement are the corresponding concepts based on the temporal view. The US Financial Accounting Standards Committee (FASB) enumerates five measurement attributes in the fifth financial accounting concept notice (SFAC5) (1984) the confirmation and measurement of enterprise financial statements, that is, historical cost, replacement cost, current market value, net realizable value and present value.

The latter four attributes belong to the present cost (current value) corresponding to historical cost.

At present, the market price is the paction price of the original paction time that an enterprise obtains assets (or liabilities), and it is the initial measurement of the assets acquired (or the liabilities it has undertaken).

Replacement cost and net realizable value are the revaluation (revaluation) of assets (or liabilities) at the time of accounting statement (or any time after entry).

Replacement cost refers to the current market purchase price of assets such as raw materials and commodities that enterprises need to reset.

Net realizable value refers to the part of the asset items that an enterprise needs to sell, such as products, products, and so on.

The present value of future cash flow is the approximate value of the current market price when the certainty and estimation value of future cash flow is unquestionable, and the discount rate is generally considered to reflect the rate of return on assets.

Therefore, this article puts the latter four measurement attributes into the category of the current cost measurement concept, making it correspond to the concept of historical cost measurement.

The historical cost measurement and the current cost measurement are recognized as a corresponding and contradictory concept because they are based on the concept of tense and have not been questioned for a long time.

The historical cost measurement model has always been the dominant single measurement mode in the world.

The "low cost and market price" rule opens a gap to the historical cost measurement model in the valuation of securities and inventory, making the historical cost measurement model no longer so pure.

The continuous global inflation in 1970s has made the historical cost measurement model crumbling. Now the cost measurement mode has taken the place of it.

However, since the mid 1980s, global persistent inflation has been curbed by developed countries and emerging developing countries. The historical cost measurement model, though not pure, has retained its position as a single measurement model.

The following points are worth noting: (1) historical cost refers to the original paction price based on account, book value is the most accurate expression of historical cost. The single measurement basis of traditional accounting statements is historical cost. The uniformity of measurement is very important to the comparability of accounting statements, and the diversity of measurement will inevitably damage the comparability of accounting statements.

(2) the relationship between historical cost measurement and current cost measurement is a "one to one" relationship, because they are based on the different time points, which are based on the market paction price (or approximate value) of the original trading time or the time of the accounting statement.

Two, fair value measurement and historical cost measurement are related but not corresponding concepts based on different concepts. The International Accounting Standards Committee (IASC) defines the fair value as: "in a fair paction, the parties who are familiar with the situation voluntarily enter the amount of assets exchange or liabilities settlement."

In the United States, Britain and other countries, there is a similar definition of fair value, such as the definition of FASB: "in the current paction, when the sale is not compulsory or non liquidating, the parties voluntarily purchase and sell assets (bear or settle liabilities)."

The British Accounting Standards Board (ASB) defines the fair value of financial instruments as: "in a fair paction, that is, in a non compulsory or non liquidation sale, the amount of the paction (the financial asset or financial liability)" is the voluntary basis of the parties who are familiar with the situation.

Looking at the above definition, the author thinks that from the definition of 1., the concept of fair value measurement is not based on the concept of tense. It is not the same as the concept of historical cost measurement. It is not a corresponding and opposite concept.

Only when we mention the present paction in the definition of FASB, it can be said that we have taken into account the temporal view of measurement.

2. fair value emphasizes fair trade, while fair trading is carried out voluntarily and familiarize with the market in both sides of the paction, so the paction price should be fair.

Although IASC does not exclude the mandatory paction price and the liquidation auction price from the fair value in the definition, unlike FASB and ASB, in the international accounting standards thirty-ninth (IAS39), it clearly states: "in the definition of fair value, there is a hypothesis that enterprises are going through the battalion, do not intend or need not liquidation, do not substantially reduce their scale of operation, or conduct pactions under unfavorable conditions."

3. in addition to mandatory paction or liquidation or partial liquidation (some subsidiary institutions liquidation) will use mandatory price or clearing price, the rest of pactions should be fair value.

People are most concerned about the fairness of the related party pactions, especially the capital pactions, non monetary pactions, mergers and acquisitions pactions, asset leasing pactions, financial instruments pactions and so on.

In these pactions, both sides of the paction should be familiar with the market situation. They often need to rely on the professional judgment (such as asset appraisal and securities evaluation), and then make the final decision by the parties.

4. 2 and 3 points above fully show that the concept of fair value measurement is not based on the concept of tense, but the problem of measurement is related to specific time points.

From the definition of fair value, it can be related to the current cost and the historical cost.

FASB in the SFAC7 (2000) application of cash flow information and present value in accounting measurement, it is pointed out that, if there is no evidence, the historical cost can also be (formerly) fair value; however, in the original paction time, paction costs are always measured at the prevailing market price. In the definition of FASB, it is pointed out that it is the current paction amount; in the accounting statement days (or any time after entry), the fair value is no longer the original paction price (historical cost), but it should be re measured according to the market price of the time of the report, so the fair value measurement contains the initial measurement and subsequent measurement.

In this regard, fair value measurement is only related to the current cost measurement.

Fair value is fair and present value.

Thus, it is related to the historical cost, but unlike the historical cost measurement and the current cost measurement, it is a corresponding and opposite concept.

In the final analysis, fair value measurement and historical cost measurement are not based on the same level.

5. fair value is not an independent new measurement attribute.

FASB thinks in SFAC7: "some of the measurement attributes described in SFAC5 may be consistent with fair value."

The author regards fair value as measurement attribute rather than holding objection, but thinks that it will not be associated with all kinds of measurement attributes, or the concept of fair value has actually "embedded" all kinds of measurement attributes, making fair value a composite (or comprehensive) measurement attribute.

However, in order to highlight the need for fair paction prices in the current pactions of concern, it is necessary to discard the usual tenses used to describe accounting attributes in the norms of accounting practice, and widely use the concept of "fair value" to refer to the concept of "historical cost".

The author thinks that this is confused on the basis of concept, maybe this is the root of different opinions.

Three, historical cost measurement mode, mixed metering mode and fair value measurement mode, strictly speaking, there is no pure accounting measurement mode, and there exists only accounting measurement mode with some measurement attribute and other measurement attributes.

As I have mentioned before, historical cost measurement as a single measurement mode has actually mixed up the current cost measurement of some asset items, and it is currently mixed with the fair value measurement of many asset items.

For example, the provision for impairment of assets; in the acquisition of enterprises, the net assets of the subsidiary companies are reflected in the fair value of their books; regardless of whether they purchase all the assets or part of the assets of the subsidiary companies, the method of amending the goodwill of the subsidiary companies according to historical cost is used to test their impairment losses. Only when the goodwill's book amount exceeds its fair value year, will it be recognized that its impairment is; in the process of developing the accounting standards for financial instruments, the trend of derivatives and all financial instruments should be measured by fair value; in the pactions of related party pactions, non monetary pactions, asset rent pactions and other pactions, fair value must be regulated according to regulations, which will inevitably make the historical cost measurement difficult to maintain as the dominant position of the single measurement mode.

It is an indisputable fact that multivariate models of mixed measurement of historical cost and fair value measurement are used. How to solve the problem of comparability of accounting statements has attracted the attention of international accounting circles.

The author believes that technological innovation and financial innovation are two major factors to promote fair value measurement.

The distinction between large enterprises and small enterprises, especially the scale marked by financial capital, is no longer the main basis. The high degree of production technology and technology as well as the degree of participation in domestic and international capital market and money market investment and financing activities are the main basis.

The use of high technology and active participation in the financial market, especially in capital market activities, will turn the large scale enterprises from the mixed measurement mode to the single measurement mode based on the fair value measurement and supplemented by historical cost (just as the historical cost measurement model is not so pure). The small scale enterprises with labor intensive and active participation in capital market activities (limited to bank financing) using general technology will maintain a single measurement mode based on historical cost and supplemented by fair value measurement.

Therefore, it is precisely because of the need to ensure the comparability of accounting statement information that the mixed measurement model has been returned to the single measurement mode (though not purely).

Four, financial instruments accounting and fair value measurement, the fair value measurement will replace the historical cost measurement and become the main measurement mode in twenty-first Century, mainly due to the measurement needs of financial instruments, especially derivatives.

In the process of developing accounting standards for financial instruments, IASC and FASB have established the goal of measuring all financial instruments with fair value.

For example, in the accounting treatment of financial assets and financial liabilities issued by IASC in 1997 with the Canadian Chartered Institute of Accountants (CICA), the financial instruments Project Steering Committee (SCFI) jointly proposed: "measuring all financial assets and financial liabilities at fair value is necessary for obtaining consistent and relevant information."

In 1998, FASB issued 133rd financial accounting standards (FAS133), accounting treatment of derivatives and hedging activities, also clearly stated: "fair value is the best measurement attribute of measuring financial instruments, and is the only related measurement attribute for derivatives."

The Joint International Working Group on financial instruments (JWG), represented by the chairman of the IASC and the representatives of the 13 country's standard setting bodies, issued a draft of the draft guideline and conclusions based on the accounting treatment of financial instruments and similar projects in 2000. It made it clear that all financial instruments should be measured at fair value. Accordingly, the mixed measurement mode permitted by IAS39 and FAS133 in the accounting of financial instruments and measured with fair value and historical cost should be abolished, the hedging accounting should be abolished, the accounting estimate should be strengthened, and the definition of fair value should be revised accordingly.

The existing IAS39 and FAS133 are pitional and temporary criteria because they permit the use of mixed metering mode.

The mixed measurement mode is allowed to be used because the fair value measurement is unreliable (lacking of current market price and reliable estimation).

Whether or not we can break through this bottleneck depends on the following two aspects: (1) the development and perfection of the capital market.

The developed countries have relatively effective securities market. The current market value of securities is regarded as the fair value of corporate equity securities and bonds. The securities market of emerging countries in pition can only be weak and effective, and the price of securities is often controlled by speculation, let alone the stock market of backward developing countries, so even the current market price of securities may be unfair.