College 1 - Fair Value

learned profession

informed economic reality

Accounting judgements requires objectief thinking to create useful information that can help decision-makers make better decisions

These decisions have consequences for economic reality and, thus, accounting purposes

This is the ‘information perspective’ on accounting, which has been a cornerstone of academic research for more decades

accounting is record-keeping and the creation of financial reports according to a set of rules.

agreed-upon means for creating rights and obligations

The use of an accounting basis is perhaps best perceived as a pattern of behaviour and our starting point is an institutional perspective of ‘understanding social behaviour as a historically informed development of rules of “appropriate” behaviour’.

a pattern of behaviour becomes finally routinised and fully taken-for-granted

institutions are mechanisms that facilitate efficient exchanges and interactions between economic players

humanly devised constraints that shape human interaction’ (p. 3) that provide the ‘rules of the game in society’ (p. 3) where the actions of players (organisations) are governed by rules (institutions).

The use of an accounting basis is perhaps best perceived as a pattern of behaviour and our starting point is an institutional perspective of ‘understanding social behaviour as a historically informed development of rules of “appropriate” behaviour’.

Institutionalisation: a pattern of behaviour becomes finally routinised and fully taken-for-granted

an institution is an agreed-upon means for creating rights and obligations among agents.

institutions are mechanisms that facilitate efficient exchanges and interactions between economic players

Institutions influence organisational choices by defining which actions are suitable and supportable in an economy

Humanly devised constraints that shape human interaction' (p. 3) that provide the 'rules of the game in society' (p. 3) where the actions of players (organisations) are governed by rules (institutions).

Institutions influence organisational choices by defining which actions are suitable and supportable in an economy

Economic welfare broadly refers to the level of prosperity and living standards of either an individual or a group of persons.

Economic Activity consists of all activities that generate Economic Value

Economic welfare broadly refers to the level of prosperity and living standards of either an individual or a group of persons.In the field of economics, it specifically refers to utility gained through the achievement of material goods and services. In other words, it refers to that part of social welfare that can be fulfilled through economic activity.

Economic Activity consists of all activities that generate Economic Value

Economic value creation is regulated to increase social welfare

In market economies, regulators are employed to guide this process

Capital allocation is only a small part of the broad economic process to generate Economic Value

Capital allocation deals with selecting investments projects with positive Net Present Value (NPV)

Accounting is only a small part of the economic value creation process

Acccounting Information provides information to facilitate Capital Allocation

Inputs: Expected cash flows Outputs: Return on Investment

Managers respond to varying levels of rule precision by varying their earnings management attempts to minimize the chance their auditors will require adjustments.

help eliminate barries to cross-border trading

Meer betrouwbare en transparante jaarrekeningen.

Eenvoudige vergelijkbaarheid

Stijging efficiënte markt.

Lagere kosten stijging kapitaal

Verbeterd de concurrentie en helpt met groei

Economische welvaart stijgt indien binnen een land regulatie sterk is met sterke instituties. Hierdoor stijgt ook de kwaliteit van de informatie.

Hoge kwaliteit accounting = Hoge economische welvaart

Door audit af te schaffen

Meer conservatism in de jaarrekening

HQI heeft te maken met de volgende factoren: internal controls, incentives, auditing en standaarden.

Conservative: record reliable values: the best historical record >> Historical Cost Accounting (HCA)

Future oriented: provide relevant information: best estimate of present value of future benefits >> Fair Value Accounting (FVA)

Despite accounting standard setters advocating the increased use of fair value, not everyone is convinced that it is a legitimate conceptual basis for accounting.

Representation of economic ‘reality

Economische welvaart stijgt indien binnen een land regulatie sterk is met sterke instituties. Hierdoor stijgt ook de kwaliteit van de informatie.

Conservatisme: Leg betrouwbare waarde vast. Het beste manier is historische kostprijs accounting

Professional skepticism can be conceptualized as both a mindset and an attitude.

Mindsets consist of a collection of judgment criteria and cognitive processes and procedures to facilitate completion of a particular task (openness or receptivity to information and the extent to which they seek out confirming or positive information).

mindset conceptualization of professional skepticism captures the idea that information processing—in particular, critical thinking—is an essential component of skepticism.

Attitudes are evaluative responses associated with a target.

exclude beliefs and feelings that drive individuals intentions and actions

Relevant targets for the attitude of professional skepticism are the financial statements

IFRS heeft de de bestaande concept van historische kostprijs en stewardship veranderd en de standaarden zijn nu meer gericht op investeerder beslissingen en toekomstige kasstromen en fair value.

Ze focussen zich op de verandering naar fair value waardering. Hiermee wordt verandering van historische naar economische gerealiseerd. Hiernaast wordt ook de verandering van weergave economische realiteit bewerkstelligt.

The conceptual underpinnings of the standards move accounting practice away from established concepts of historical cost and stewardship towards concepts of investor decisions based on future cash flows and fair values

managers respond to varying levels of rule precision by varying their earnings management attempts to minimize the chance their auditors will require adjustments

managers were more likely to attempt earnings management that were either structured to comply with precise standards or unstructured with respect to imprecise accounting standards

Auditors often compromise in client negotiations when accounting standards do not provide precise guidance

auditors are less likely to adjust earnings management attempts that were either structured to comply with precise standards or unstructured with respect to imprecise accounting standards

auditors are more likely to adjust earnings management attempts that were either structured to comply with precise standards or unstructured with respect to imprecise accounting standards

Auditors not compromise in client negotiations when accounting standards do not provide precise guidance

mechanisms that facilitate efficient exchanges and interactions

rules of the game in society

Economic welfare broadly refers to the level of prosperity and living standards of either an individual or a group of persons.

rules that facilitate efficient exchanges and interactions