Appropriate Application of Ias
FAIR VALUE ACCOUNTING AND THE MANAGEMENT OF THE FIRM * Benzion Barlev, , * Joshua Rene Haddad * Department of Accounting, School of Business Administration, Hebrew University of Jerusalem, Jerusalem, Israel
Received 15 October 2001
Accepted 20 April 2002
Available online 26 September 2002 * http://dx.doi.org/10.1016/S1045-2354(02)00139-9, How to Cite or Link Using DOI * Permissions & Reprints
Abstract
The development of accounting standards reveals that the historical cost accounting (HCA) is being replaced by the fair value accounting (FVA) paradigm. FVA, in contrast to HCA that hides the real financial position and income, is more value relevance. The relevance of financial reports should be measured, in addition to association between market and accounting returns, in terms of its contribution to the stewardship function, reduction of agency costs, enhancement of management efficiency, and providing relevant information to stakeholders and workers in their social conflict. FVA-based reports call the attention of shareholders to the value of their equity and enhance the function of stewardship. Managers will be asked to guard the value of shareholders’ equity and to account for their efforts. This will causes a basic change in managers’ perceptions of their duties. The FVA provides also a complete full disclosure and it is compatible with transparency.
Introduction
An analysis of the development of accounting standards reveals an interesting phenomenon. Along with new financial reporting innovations in sporadic areas, there is a steady process of change of a basic accounting paradigm. The old historical cost accounting (HCA) is being replaced by the new fair value accounting (FVA) paradigm. These changes reflect the needs of users of financial accounting and the efforts of accounting standards setting bodies to reverse the pattern of declining relevance of financial information ( Francis & Schipper, 1999 and Lev &
Received 15 October 2001
Accepted 20 April 2002
Available online 26 September 2002 * http://dx.doi.org/10.1016/S1045-2354(02)00139-9, How to Cite or Link Using DOI * Permissions & Reprints
Abstract
The development of accounting standards reveals that the historical cost accounting (HCA) is being replaced by the fair value accounting (FVA) paradigm. FVA, in contrast to HCA that hides the real financial position and income, is more value relevance. The relevance of financial reports should be measured, in addition to association between market and accounting returns, in terms of its contribution to the stewardship function, reduction of agency costs, enhancement of management efficiency, and providing relevant information to stakeholders and workers in their social conflict. FVA-based reports call the attention of shareholders to the value of their equity and enhance the function of stewardship. Managers will be asked to guard the value of shareholders’ equity and to account for their efforts. This will causes a basic change in managers’ perceptions of their duties. The FVA provides also a complete full disclosure and it is compatible with transparency.
Introduction
An analysis of the development of accounting standards reveals an interesting phenomenon. Along with new financial reporting innovations in sporadic areas, there is a steady process of change of a basic accounting paradigm. The old historical cost accounting (HCA) is being replaced by the new fair value accounting (FVA) paradigm. These changes reflect the needs of users of financial accounting and the efforts of accounting standards setting bodies to reverse the pattern of declining relevance of financial information ( Francis & Schipper, 1999 and Lev &
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