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Fair value measurement on property, plant and equipment and investment property

Table of Contents

1 – Introduction

2 Definitions, meanings and theories of creative accounting

2.1Definitions and meanings

2.2Acceptance and reasons

2.3Manifestation and methods of creative accounting

2.4Purpose of creative accounting

3Accounting measurements and controversial issues

3.1Methods of measurements

3.2IFRS standards and measurements

3.3Issues arising from IAS 16 and IAS 40



As Blake and Lunt (2000, p.375) rightly surmise within their work on accounting standards, the term “creative accounting,” was originally coined by the media, and it was particularly prevalent around the time of the Enron financial disaster. It was partially because of the financial collapses of firms like Enron and the major debate that followed these events, that International Accounting Standards were introduced. Amongst the main objectives of these standards, which were intended to make financial statements easier to understand and provide for more transparency (Alfredson et at 2007, p.6), one of the aims was curtail future opportunities for creative accounting.

The IASB[1], when designing these standards started from the premise that corporate business had an obligation to account to investors, creditors and other stakeholder on a regular basis, usually within the annual financial statements, about the “performance, situation and future prospects of that business” (Alfredson et al 2007, p.4), which the focus being on the accuracy of this information. It thus sought to legalise this obligation and, through the standards, ensure that this result was achieved. However, despite the introduction of the standards and regulations, as Mulford and Comiskev (2002), Blake and Lunt (2000) have observed, irregularities in financial statements are still occurring. Many academic and professional observers are of the opinion that the measurements introduced by the IASB is serving to “obscure concrete evidence” in financial statements (Swanson and Miller 1989, p.1).

In particular these concerns are centred around the board’s movement away from historical cost accounting to a system of “fair value” accounting (Alfredson et al 2007, p.48), the introduction of which was against the wishes of many stakeholders (Williams 2006). Fair value is intended to improve the accounting measurements used in financial statements by ensuring that these reflect relevant and current valuations of the business (Blake and Gowthorpe 1998, p.1). However, the argument against fair value, quite apart from the fact that it takes up an inordinate amount of management time (Scott 2003, p.2), is that it provides opportunity for manipulation and misuse and thus increases the potential for creative accounting. This is particularly prevalent in the area of asset valuation.

The intention of this study is to investigate the arguments and debate that continues to surround the concepts and practices of creative accounting and the impact, if any, that “fair value” has had upon this issue. In particular, the study will concentrate upon these elements in relation to their use in the valuation of property, plant and equipment and investment property, which can in many companies, form a major part of their current balance sheet valuation. The objective is to assess and evaluate whether the introduction of the fair value concept has led to the intended improvement of financial reporting in these specific areas of the financial statements, or if creative accounting methods and processes are still being used to circumvent these improvements. It has been decided to conduct this research by using a literature review format.

2.1Definitions and meanings
Before being able to assess the extent to which the concept of “fair value” has impacted upon the reporting accurate values of assets in financial statements and the reduction of the prevalence creative accounting following the introduction of new standards and measurements, if any, it is important to understand the meaning and theories of creative accounting. Furthermore, understanding the reasons why these actions are being taken by so many corporate organisations is of equal relevance.

Within the wealth of literature surrounding accounting and accounting standards, there are a wealth of diverse definitions for the term creative accounting Hey-Cunningham, D (2002). For example, from an academic viewpoint Blake and Lunt (2000, p.375) define it as “that which does not faithfully represent the underlying commercial activity and is therefore not neutral.” Amat et al (1999, p.3) use even stronger terms to define creative ac counting, which they indicate is “a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business.”

As is perhaps to be expected, other stakeholders have been more forthright in their definitions and opinions. A business journalist, Ian Griffiths (quoted in Amat et al 1999, p.3), reveals the media view when he stated, “Every set of published accounts is based on books which have been gently cooked or completely roasted” commenting further that “It is legitimate. It is creative accounting.” An Investment analyst, Terry Smith, interviewed by the same authors (Amat et al 1999), also showed the level of concern felt about creative accounting in this segment of stakeholders. He commented, “We felt that much of the apparent growth in profits which had occurr