Research On The Application Of The Fair Value On The New Accounting Standards Of China

In the past decades the fair value question has always been one of the most challenging ones in the international accounting world. Now the discussion about this question has been extended to how to improve the fair value, not be limited to which one is better between the fair value and historic cost. The research about the fair value didn't start until in 90s of 20th century, and was first applied in the debt recombination and non-monetary transaction criteria in 1998. But due to the immaturity of production element market, the lack of active market and the inadequate supervised mechanism, the fair value is difficult to obtain, resulting in the big random in application of these accounting criteria. With the application of the fair value in the debt recombination, non-monetary transaction and investment criterion, it has come to utilize the fair value to control profit by companies. So there was no choice but stop the utilization of it, but the research of it has been insisted on in China. On February 15th, 2006, the new accounting standards come into effect, the most obvious characteristic of which is the reutilization of the fair value, whose range is magnified compared with that in 1998. On such background, this paper aims to study the influence of the utilization of the fair value in the new accounting standards in order to offer some references to its better application in more fields in the future and do good to exploit better the new standards.This paper encompasses 8 chapters. This first chapter introduces the research background, that is the reutilization of the fair value in the new accounting standards, the significance, that is to achieve better implementation of the new standards and better application of the fair value in more fields, and the retrospection to the application of the fair value in foreign countries, mainly taking the US and international accounting standards as examples.The second chapter is mainly concerned about the basic theory of the fair value. First of all, the background of the boom of the fair value is presented. Because of such factors as currency inflation and price fluctuation, the historic cost exposed its defects. Subsequently, the appearance of things like intangible assets, human resources and environmental accounting, boosted the generation of the fair value. However, the emergence of derivative financial instruments is the key element to realize the fair value to be one of equivalent accounting properties as the historic cost. As for the definition of the fair value, according to those definitions in US, international and Chinese accounting standards respectively, it's defined in this paper as one composite accounting property, consisting of the other four accounting properties in general.As for the accounting aspect of the fair value, this paper presents the market price method, analogous project method and estimate technology method, all of which correspond to different cases of assets and should be chosen according to the benefit-cost standard. Furthermore, here the merits and drawbacks of the fair value are expressed through its comparisons with other accounting properties. The merits are largely attributed to the following two points: firstly, it can satisfy the decision demand of information user; secondly, it can reflect the performance of companies objectively and complies with the proportional standard. As for the drawbacks, the reliability of information can't be guaranteed, and both the great difficulty in performance and high execution cost can lead to large fluctuation of the report. Though the fair value compared with the historic cost has great advantages, it's easy to be a tool for companies to control profits. From the analysis of this paper, this phenomenon is due the so-called value of fair value as one kind of utility value. But the reason of reutilization of the fair value in China should be contributed to the four sides below: firstly, the fair value itself has a profound theoretical basis(decision utility) and an actual basis; secondly, the utilization of the fair value is the necessary for accounting internationalization; thirdly, it coincides with the environment of economic development in China; fourthly, better actions have been ready to prevent the fair value from being a tool to control profits once more. In the end of this chapter, the fair value has been confined to the following five fields as investing real estate, debt recombination, non-monetary transaction, company combination and financial tools, and serious restrictions has been put to its applications at the same time.The third chapter discusses the influence of application of the fair value in the investing real estate standard. Due to the continuous prosperity of real estate, the adoption of the fair value possibly can make companies to increase the current net assets and net profits. But if the fair value is used, the cost of accounting will be rather large and its reasonability can't be guaranteed either. Once used, it will augment the instability of company performance. Besides the tax problem, most of real estate companies wouldn't like to choose the fair value accounting property preferentially. All these factors will result that the influence of the fair value on the real estate industry is not as big as that imagined. When compared with the international accounting standard, the new accounting standard in China will be more careful to the application of the fair value, for there are some differences in dealing with any discrepancy between the fair value and the original currency amount of real estate when the stocks are converted into the investing real estate according to the fair value accounting.In the fourth chapter, the influence of the application of fair value in debt recombination and non-monetary transaction standards is analyzed. In the new standards of China, regulations about these two standards are similar with those in the international accounting standards and the old standards of 1998, where the value of debt recombination or non-monetary transaction is included in the current profit and loss, which may cause some companies to control profit by falsifying reports through debt recombination and non-monetary transaction. Therefore, serious supervisations should be imposed on the debt recombination and non-monetary transaction to examine the real essence to the trade so as to avoid the cases of profit controlling.In the fifth chapter, the application and influence of the fair value in the company combination standard are exploited. First of all, the new standards classify the accounting disposal in company combination into two parts, one under same control and the other under different control. The former one takes the method of book value accounting instead of that in the old standards, which reduces the opportunity to profit control. But the latter one takes the fair value so that the price can be established by bargain and can be regarded to be fair. The possibility to realize the current profit is tiny. Simultaneously, the new standards allows not to record the negative goodwill and decrease the goodwill on annual basis, but to measure its decrease every year, thus which lend great flexibility to companies. If companies pay emphasis on the current profit index, no disposal is taken; but if they care about the currency flow, then the opportunity of profit control will be obtained by accelerating the decrease to delay the payment of income tax. An example is listed in this chapter to illustrate the effects of regulations of the new standards on the profit and other indexes. Comparisons with the international accounting standards have been carried on about the purchasing identification criteria, disposal of payments and goodwill.In the sixth chapter, the application and influence of the fair value on the financial instruments are discussed. Because the financial instrument, especially the derivative financial instrument is the direct impetus of the generation of the fair value, the difficulty of the promotion of the regulations of the fair value on the financial instruments is explained. Afterwards, the application and influence of the fair value on the financial accounting standards of China and the corresponding challenges faced by the performance and supervisation of banks.In the seventh chapter, some suggestions are shared in order to make good use of the fair value. Firstly, the whole profit should be absorbed. Second, nice environments should be established to implement the fair value. Third, clear accounting destinations should be obtained.In the final chapter, the fair value is regarded as one trend of development in the future, but it's difficult to replace the historic cost in a short time. So in the long term, both should be adopted by preference.This topic was established just after the new standards were promulgated but before they are put into effect in the whole country. Some tentative analysis is carried on the application and influence of the fair value in the new standards, and some perceivable problems are discussed, which may offer some references to the future improvement of the standards. The deficiency of this paper lies in the shallow depth of data collection and lack of support of actual data. The future job will be focused on such aspects.