APPLICATION OF FAIR VALUE ACCOUNTING IN NIGERIA: PROBLEMS AND PROSPECT
1.1 BACKGROUND TO THE STUDY
The determination of the overall growth of most cost depends on how efficient and elective
the method of financial reporting is, and in the Nigeria case
there are still lots of problems, challenges that have hindered the Nigerian financial reporting standard from attaining international status and these pose a greater challenge to implementation of fair value accounting in Nigerian financial system.
Fair value accounting was a term applied widely in the 1980’s within the context of acquisition as a basis for the allocation of entry values and purchase goodwill, though it encountered difficulties and controversies.
Fair Value Accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing bases, certain
assets/liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities. It primarily applies to financial assets and liabilities but however, three major groups of non-financial assets-property, plant, investment property and intangible assets –also subject to fair value measurement.
Whereas the application of fair values induces favorable higher earnings and a steady increase of carrying values in good times, the situation is completely
reversing during bad times when price declines put pressure on company’s earnings situationsDuring the times of the financial crisis, the application of fair
value accounting led to a recognition of losses from increased risk of default expectation at an earlier stage compared to historical cost accounting.
Thus, critics oen
argue that the excessive write-downs due to falling market prices set o
a downward spiral when the banks were forced to sell their assets
at fire prices, which in turn can lead to contagion as prices from asset fire sales from one financial institution become relevant also for other banks.
Generally Accepted Accounting Principles (GAAP), defined fair value as the amount at which an asset can be bought or sold in a current transaction between
willing parties, or transferred to an equivalent party, other than in a liquidation sale
Fair Value Accounting also refers to a financial reporting approach which requires or permits companies to measure and report on ongoing bases, certain
assets/liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be
relieved of the liabilities. The introduction of the fair value concept to financial reporting has meant a change from the classic principles of the accounting system based on prudence and reliability.