ACCOUNTING THEORY PBL Report Task 4

Prepared by :

Group 4 Nadya Azahra Rangkuti (023100004) Amelia Erfa Hilmy Arya Angelina C. Sinulingga (023100072) (023100081) (023100163)

Trisakti University 2013

PBL Report Task 4 The Trend toward Fair Value Accounting

Kind of task

: Problem Task

Main Problem : How some exposures such as relevance and reliability affect the measurement in accounting. Analyze Problems :

1. What you think is the fundamental problem with financial statements based upon the historic cost measurement principle used under US GAAP? 2. What do you think of the principle accounts must reflect economic reality as a core principle of measurement in accounting? 3. How would you measure economic reality? 4. What is reliability in accounting? Learning Objectives : The importance of measurement. The difference between fundamental, derived and fiat measurements. What is meant by reliability and accuracy in accounting measurement.

Solving Problem : 1. Firstly, we need to know about the historical cost itself, which is a measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principles (GAAP).

In our opinion, the fundamental problem with financial statements based the historical cost measurement principle under US GAAP is that use historical cost accounting measurement is gradually making information in the financial statements is not up to date. Financial statements are actually needed and used by capital market participants, investors, and other users become less relevant and useful. Based on several sources, the financial statements under the historical cost more measurements contain information that is inferior or less useful. It is also supported with no pros and cons of a larger composition between reliable and relevance as found in the case. In PSAK 16 about fixed asset, we knew that there has been some revision about the measurement. It used to be under historical cost for measuring fixed asset, but now we are using fair value cost for it. Based on the historical-cost principle, under U.S. GAAP, most assets held on the balance sheet are to be recorded at the historical cost even if they have significantly changed in value over time. For example, say the main headquarters of a company, which includes the land and building, was bought for $100,000 in 1925, and its expected market value today is $20 million. The asset is still recorded on the balance sheet at $100,000. So it can be fundamental problem with financial statements based on the historic cost measurement principal under US GAAP. There is always a problem that cannot be avoided is that historical cost accounting does not recognize the change in the value of an economic character, and tend to let the company choose for themselves whether and when to recognize these changes. This encourages a bias in the selection of what is being reported, and worsening compromise. 2. We think that the core principle of accounts must reflect economic reality is a clear guideline that any accounts that have been perceived in financial statements must be descriptive. This means that the accounts should be describe the enrichment of economic fact that really exists in enterprises, without any manipulation. Like what has been interpreted as one of six accounting image by Belkaoui, it is also can be viewed as the means of determining the true income of an entity namely the change of wealth over time.

3. Based on previous answers, it can be said that the disclosure of the accounting demands truth in the financial statements which can be viewed either from the income statement and balance sheet. Therefore, to meet the economic reality of the concept of the disclosures required by fair value that indicates a change in the value of an account, not only based on its historical value. By recording the fair value based on the economic reality can be known a company. 4. Based on Concepts Statements no.2 defines reliability as the quality of information that assures that information is reasonably free from error or bias and faithfully represents what it purports to represent. With respect to measures, it states that the reliability of a measure rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the user, which comes through verification, that it has that representational quality. Thus, the principal components of reliability are representational faithfulness and verifiability. Reliable has three main

characteristics, those are: a. Can be checked, which is the consensus in the choice of accounting measurement that can be assessed its ability to determine whether the information presented is based on certain methods give the same result if the same method is verified by an independent party. b. Honesty of presentation; the lack of compatibility between accounting numbers and descriptions as well as its sources. c. Neutrality; neutral accounting information intended for the general needs of the users and in spite of certain assumptions about the needs and desires of the users certain specific information.