Allied Academies International Conference Maui, Hawaii October 14-17, 1997 Academy of PDF
Preview Allied Academies International Conference Maui, Hawaii October 14-17, 1997 Academy of
seimedacA deillA InternationCaoln ference Maui,H awaii Octobe1r4 -171,9 97 AcadeAomcfyc ountianngd FinanciaSlt udies Proceedings Affiliates slanruoJ International Academy for Case Studies Journal of the International Academy for Case Studies Academy of Entrepreneurship Academy of Entrepreneurship Journal and the Entrepreneurial Executive Academy of Accounting and Financial Studies Academy of Accounting and Financial Studies Journal Academy of Managerial Communications Academy of Managerial Communications Journal Academy of Educational Leadership Academy of Educational Leadership Journal Academy of Marketing Studies Academy of Marketing Studies Journal Academy of Strategic and Organizational Leadership Academy of Strategic and Organizational Leadership Journal Academy of Free Enterprise Education The Journal of Entrepreneurship Education Academy of Information and Management Sciences Academy of Information and Management Sciences Journal Academy for Studies in Business Law Academy for Studies in Business Law Journal deillA ,seimedacA.cnI 3, 2eC7eN8h2wo l, l 9Oux8PCo6B2 An International Non Profit Association 704 9;-13 59X12A9-F-430 97e2c-i4o0V7 of Scholars and Practitioners gro.seimedacadeilla.www Allied Academies International Conference page ii em u rl,eo2bVmu2N 1997 eh tf osgnideecorP dn agnitnuocc Af oymedacA Financial Studies October 14-17, 1997 Maui, Hawaii oJ nnA dna miJdnalraC Co-Editors Western Carolina University s gfenohitdee ceohrTP ymedacA fo gnitnuoccA dna laicnanisFeidutS de hesr iaylbbupeht ,s ed,ie.micelndlIaA cOAP x,oe Be,h9 w8,o6Cl2.Nl3u2C782 dnTa gnitnuoccA fo ymedacA eh laicnaniF seidutS si na etailiffa fo ehtdeillA forp-nAon ,lanoitanretni na ,seimedac esop reusp oshrwalo hnfcoositaico stsia .egde le wgfononak heecghxateru otdcrnn oaes pioptus thg i7r9y9p1o Cyb , se ehdi.temcienldIlaAcA Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page iii eh tf osgnideecorP dn agnitnuocc Af oymedacA Financial Studies stnetno Cf oelbaT r:isaeF ull aaw uVeAt ipsv eiedcsRnngeaonh Citlft naontyiunScoenccacenARiF Standards on Financial Instruments .................................................... 1 leahciM .O ,hasneM ytisrevinU fonotnarcS not ny atfriocsSre v,inn eUg yn.uoVgHN hadl u. HA,n eaagyneRolIloC gnitceleS gnoma evitcepsor P:sreyolpmE srotcaF gnitnuoccA stnedutS redisnoCtnatropmI ............... 12 Carl R. Phillips, Southeastern Louisiana University Antoinette S. Phillips, Southeastern Louisiana University srevo egknaiTcudeR-ht lganeiWwo lelconFanr eevtoaGr os psfreoonCevitceffE ......................... 15 hsekaR ,lagguD nretsaehtuoS anaisiuoLytisrevinU s eeihtTiu qfgeo nnyiIttinuuqoEccA ......................................................... 23 Gilbert Farrell Gean, Pepperdine University ehT tceffE fo eht ruoh-051 eluR no yratnul orVevonruT ni cilbu PgnitnuoccAsmriF .................... 24 Suzanne B. Summers, Lander University yrryat Hi ,.srmGreuedlvnAiacnLMU A Contingency Theory for Organizational Transfer Pricing ........................................ 30 oneR- ayd tafivoserNe v,i snla Uem.aoFhhcTiM Situations Implying Opinion Shopping: Perceptions and Implications ................................ 43 nass a,Hidobha pnsrEetse WsioniyltliIsrevinU ,ai zdne oyrRsbteihitoassnpreiseWlEvliInU An Empirical Investigation of Factors Contributing to Budgetary Slack ............................... 44 nwotnwod-nots uyfotoHisrev i,nsUniv an.ehRLoJ Khondkar E. Karim, Monmouth University pilihP .H , lyhettgiuesoirmSenvoiMnU t nl ea dmn eetrftiseoafutRij n ddfInoAorMu tr eoeRfla cdsSne acenm einrTaepfSfiD .................... 57 David Cary, California State University, Northridge Michael Dunn, California State University, Northridge The Search for Fraud in Auditing: An Historical Review .......................................... 64 Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page iv ytisre ve itinarUtuSo stssieMwh t,yrt rot.aNoRMcS ytis rieertv uai totnassSUdesn wii.,hMLLetyrroFN MQT :gnnnioiittnaucoucdc EA neve SspetS otytilauQ .......................................... 72 ytisre ve itinarUtuSo stssieMwh t,yrt rot.aNoRMcS J. Patrick Mclaughlin, Northwest Missouri State University gnisU lageL ecruoS stnemucoD ot ecnahnE gnihcaeT dna noitacilppA fognitnuoccA ledamsnro taecxcdnaeeITjFbuS ..................................................... 81 oraG ,nayaf laaiKnrofilaC etatS ytisrevinUonserF : yg lgtndaniienivtsotis a istorBtocCoiCAdarT etrn AeyyrelehlfTafeiRD ............................ 86 ytisr eesvtu iabrn tmeU,S ugg.ldgRooiCRrT ytisre ve itsnauUtbSm u,ldo nCra el.glGdooHR ytisre vei tnsaUutbSm u,lyo eCy dr.naEuGK A Hierarchical Classification of International Auditing Characteristics ............................... 89 yti s ire re tluvtanoisthsn eSa sU.wR,iAhdMtorooWN Audit Selection: Increasing the Efficiency of Sales Tax Administration ............................... 99 ,esie lnysrteaiLtC S dhngauor ofBouaenuJ tystai esa fhrk,otessuvamo ilaSenAiiUlklciiWV gnitseT eht ytilauQ fo latnemn oyrtiivlniEbsaeirLusolcsiD ....................................... 102 tsaeh tau koy sStfaiolsAre vt ,ie.ennLyUaDJ tystai es a fhrek,oteissuvkam oicla.SniAiLUVlliW What Determines R&D Expenditures in Computer Industry? An Empirical Investigation from Accounting Analysis ................................... 103 s ay mtf.oiothsSTre v,i gn.enUCoeJU C. Christopher Lee, Central Washington University weN ecnedivE no efiL-etiniF dna lautepreP laeR etat stEnemtsevnsItsurT ........................... 107 nwotnwoD-not s yuftooiHsrev i,n r Udr.iuWvDaD Khondkar E. Karim, Monmouth University pilihP .H , lyhettgiuesoirmSenvoiMnU lan osiesdsuetfiotrtPA dna :sfeileB Alaitnere ftfsieDT fo erutluC dnaredneG ......................... 116 Aileen Smith, Stephen F. Austin State University adl ii,Gprpeicsa sgeiyAtstasitisSMrevinU stnanimreteD fo OEC kcotSsnoitpO ........................................................ 124 n oy tt, sisfu saoo.rm Hteo,SvhyiTm naaUwt si.anMmiaVR yt i,sz ren edofvnmoiaannRUr e .F,tnsSoatmsouhoTH ehT scimonocE fo gnitnuoccA noitacudEegnahC .............................................. 133 ytisre veisnuUc a, ridyseSnmOahoM Sas No. 55: Analysis of Presentation in Current Auditing Texts .................................. 134 aic r.yaStMi sf or o,hesavedilIniUN Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page v yo t hfiaaos ldr.rIe Aav,Mis nrUeyM William L. Felix, Jr., University of Arizona Staff Accountants’ Overreliance on Computer Tax Return Preparation Programs ...................... 135 yo t hfiaaos ldr.rIe Aav,Mis nrUeyM Determinants of Price-earnings Ratios in the Oil and Gas Industry ................................. 136 Philip L. Little, Western Carolina University w o :l td slocrAeotAai FHdnawLotsdr aeehBT ................................................ 137 C. Angela Letourneau, Winthrop University David E. Letourneau, Winthrop University : gnn oi citeisnhssu TneofefcorocorAF PehetrutuF ............................................. 138 Jason W. Carland, Western Carolina University tcapmI fo sgninraE ytilibairaV no sgninraE esnopseRstneiciffeoC ................................. 139 nehpetS .R ,eh ccs itylitorihFstraeCvin UfoaciremA oe gc. y enR,ntwe kuasrrSOoilKF ytisrev iensUuca r ,yd.oSlJ baorLeG Computer Assisted Learning: Effect on Student Attitude and Performance ........................... 140 adnaW .I ,oeleD porhtniWytisrevinU C. Angela Letourneau, Winthrop University sn o dik etcot potasOtleSetRam ietssn EenpoxiEtas nye cpfamorouCccA ............................. 141 nhoyJ t.iC ser se,uvnc ioansrUryeSdnA ytisrev iensUuca r ,yd.oSlJ baorLeG ytisre vt hi s fpnaa.leUdoCusiC Go r,JoeluFR ?:nmo u ittet c nsa tead sermoe h enkemert ketwrecoovoorherToDMeftatNetRnMvSIO ................ 142 ,ys tnwiaese N rla,erlrvOoeiynn otUnLsoiRrhC Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page 1 D NWAEIV ELRAUTPEC N: OSACEUL ARVIAF GNITNUOC CLAAICNAN ITFNEC EFSROISEHTNYS STNEMURTS NLIAICNAN I NFSODRADNATS notnar c fSyotisrevi n,Uhasn e .MlOeahciM ude.sfou@253MOM notnar cfySotisrevi n,Uneyu g.gNVnoH egell oaCn o,Ina y .RhAadluH TCARTSBA rf lautTpecnoc a stneserp repap sih amework useful for an integrated classroom discussion of accounting for .stnemufrtsni laicnani We chart the special characteristics of these assets and liabilities as a basis for an analysis of the relevance of various attributes for financial reporting purposes. We also present a synthesis of existing FAS B .stnemurtsni lapicnanif no stnemecnuonor This integrated conceptual approach appears to be more effective than the fragmented treatments found in financial accounting texts. NOITCUDORTNI I n kciuq ,noisseccus eht laicnaniF gnitnuoccA sdradnatS draoB )BSAF( sah deussi lareves wengnitnuocca standards f or financial instruments since 1990. These new standards constitute the results to date, of the FASB' s ongoing efforts at improving financial reporting for this broad class of assets and liabilities, many of which hav e laicnanif ni snoitavonni trnecer morf detluse markets. Some of these standards attempt to improve financial reporting ,lareneg ni stnemfurtsni laicnanif ro et ue tseessinlhr'toit eBsph oh SnswdtttAoeeonF c rveedigheertec unrreopfwen standards ni cificeps saera dna erofereht ylppa ot detimil sessalc fo laicnanif .stnemurtsni sA a tluser fo sihtowt - er lacigolponorhc a ,hcaorppa degnor gnida fo s derh atsdenoadt st o yneldiisvaoer pa reareultcc ifpotne mephotleved fo ,sevitce jsbtopecnoc dna seigolonimret ni siht .aera ,oslA tsom snoissucsid fo accounting standards for financial ni yllaicepise ,stnemurtsn ,skoobtxet era detnemgarf stnemtaert derettacs revo esrevid .scipot ,sihT dna ehtylevitaler egral rebmun fo st nw eegmnneicvniurorn aorrepvo eht tsal evif srae ysetaerc em onso igsnuifdnroacge rehts'BSAF a siht oni sevitcejbo llarev rea, and the unifying concepts and terminologies of these new standards. It is also difficult tatbo o in a clear understanding of the areas to which each standard applies and how the standards complement each other. oc a edivorp ot )1( :era reTpap siht fo sevitcejbo eh nceptual framework for teaching the unique characteristics aicnanif tneuqesnoc eht dnoa stnemurtsni laicnanif f l reporting goals in this area, and, (2) to provide a synthesis of the requirements of the accounting standards that have been issued to date on financial instruments. Thus, this pape r sedivorp an integration of concepts with specific accounting requirements that can enhance student comprehension me stnemecnuonorp rehtruf gnitaicerppa rof syek laanoitacude edivorp dn erging from the FASB's financial instruments .tcejorp :swollof sa dezinTagro si repap siht fo tser eh nI noitceS ,I ew enifed dna edivor pnoi taacif ifsoslaaliccnanif i stnemurtsn lufesu rof gnihcaet rieht tnavel e.rscitsiretcarahc eW osla ssucsid eht etairporppa sevitcejbo folaicnanif repor ting for financial instruments, given their special characteristics, and outline the FASB's current strategy fo r a ihc eving better financial reporting for financial instruments. Section II examines the pervasive financial reporting concept commo n ot lla eht tnaveler sdradnats deussi yb eht .BSAF ,yltsaL ni noitceS ,III ew etargetni eht'BSAF s acco unting and disclosure requirements, to date, for financial instruments and provide concluding observations i n noit.cVeIS Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page 2 SEVITCE JGBNOITRO PDSENTRANEMURT SLNAIICN A WNFEIOIFVREVO STNEMURT SLNAIICNA NEFIROFU TEAHNT The FASB defines a financial instrument as: " ,hsac evidence of an ownership interest in an entity or a contract that both: imposes on one entity abo lautcartnoc ligation (1) to deliver cash or another financial instrument to a second entity or (2) cnatnif egnahcxe o lai stnemurtsni no yllaitnetop elbarovafnu smret htiw eht dnoces "ytitne,BSAF( 1990 par. 6) snomed ot dengised ew Edia moorssalc a si 1 tibihx etart deifissalc selpmaxe fo laicnan isftnemurtsni sa denifed.evoba Wingocer ot elba erew stneduts trahc siht hti .s mt e nnlsseebepme ocu ewtsrnoer taupertueehorgaszbtieearfreafcmvid etaerc taht seititne neewteb stcartnoc fo selpmPaxe wohs C dna ,B ,A slena various instruments according rights to cash t otnemurtsni laicnanif rehtona r snoi tg na nyogoiliss loue bpo h eom ertyniyne totaheiittlttloin nuheeoemwdtiisvorp cash or deliver financial instruments at a future date. ,yllacificepS Panel A contains examples of financial instruments that assign rights and impose obligations involving definite, contractual future cash amounts. These are traditional monetary balance sheet items which can bderc ot tcejbus e it risk, market risk or both for the contract holder. The risk of accounting loss associated with these items, ,reve wsyoilhlausu limited to the contract face value as reported on the holder's balance sheet. Traditionally ni seicnetsisnocni tneeb evah ereh the accounting treatment for similar transactions, and the accounting literature has fesuco ,syn loea iredsuH is(ncooe lidncto sayi mrdera hone tfourn iso igtsi' neivsfi rarovfcheros egeiebasdhn-tafmles L dna 19911 ,naolS dna wohceD ;589 ewellen et al., 1996). these inconsistencies have been evident in the accounting t rof tnemtaer financial instruments. These items have been reported on the balance sheet by the issuer and holder at ulav elbazilaer ften ,eulav eca e, or amortized value, or as disclosures in the footnotes to the financial statements, with m lp noitercsid tnemegana aying an important role in determining whether to recognize or to disclose these assets and liabilities. Fair value accounting or disclosures were not required for these instruments. Panel B osla sw osheslpmaxe f olaicnanif instruments that convey rights and impose obligations involving eht ,revewoH .stnuoma hsac erutuf ldautcartnoc elbanimrete rights and obligations of these instruments are contingent tneove erutuf cificeps n s such as the default of a third-party on a loan made by the holder of the financial instrument. Both the holder and the issuer of such contingent rights to future cash face credit risk, and the highly probabilisti c future cash secneuqesnoc fo eseht stcartnoc evah yllanoitidart neeb dedrocer ecnalab-ffo teehs ni eht mrof foton e .serusolcsid M eht fo yna examples of financial instruments listed in Panel C are the result of fairly recent developments dart dna nettirw neeb evah stnemurtsni esehT .steikram laicnanif n de sa eeshtnta ais eve ymem hbliscltmiaerhmiwofs the effects on their future cash flows of volatility in financial markets, including interest rate, foreign exchange rate ra stnemurtsni eseht fo emoS .seitiliatalov tekram kcots dn e erof edreerhituqca rof eht esoprup fo gnidle iehrsutufhsac receipts or payments from underlying assets and liabilities against swings in the markets in which these financia l eg era yehT .dedarti era stnemurtsn nerally acquired in the hope that their values, in response to market changes, will cvafnu tuo lecna elbaro eulav stneme vgonmitceff adetaler stessa ro .seitilibail eseh Tstnemurtsni era oslasemitemos nettirw dna dleh yb seititne sa evitaluceps.stnemtsevni uorg esrevid eht fo citTsiretcarahc elbaton tsom eh p of instruments in Panel C is that they derive their market ednu na fo eulav evht ni segnahc morf eula rlying financial asset such as the price of a stock, changes in a stock index, the exch ange rate of a currency, or changes in interest rates. These are therefore derivative financial instruments . itpo fo mrof eht ekat yllausu D stnemurtsni laicnanif evitavire d,r sa ,ew s srrrteenuoo csrotfpaouhuarhtsfwtwuasnfcoc cons secneuqe rof eht seitrapretnuoc nac eb tcejbus ot tiderc ,ksir tub era denimreted yb daorb ymonoce dnaekram t fact sro and therefore also have significant market risk. These risks can result in accounting losses beyond an y c htob rof ro tcartnoc eht fo reussi eht rof stnuoma teehs ecrnalab dezingoce ounterparties in the case two-sided contracts such sa serutuf dna sdrawrof sa shown in Exhibit 1. Accounting for derivative financial instruments is an evolving aoiraV .aer su ,sehcaorppa hcus sa ,tsoc tekram ,eulav dna eton erusolcsid evah neeb desu yb seititne ni eht .tsapehT cca ni ytimrlofinu fo kca gnitnuo dna erusolcsid secitcarp rof sevitavired sah neeb eno fo eht niam snoitavitom rofeht FASB's efforts with financial instruments. Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page 3 tibihx E: 1sci tssti n rf leeolamtaiu cccrs aintadrpaseaynnnhTiIiCFfe Dni SAFS501 laicnaniFtnemurtsnI s’rneouistsaIgilbO s’redloHsthgiR r es ukfssosiIR rse kdfsloioRH LsEe Nce Anll Pe ba :uhausAqsn t teaidce nsCmnathe nraritmloetniua CtniwrieoftcDCesnDnaIniF laicnaniFtnemurtsnI noitag isl'brOeussI sth gsi'RredloH r es ukfssosiIR rse kdfsloioRH Cash hrsneaovc iolTed h seavcie coeTr ____ Credit Risk dnam edDnaemiT dnamed ro tadeificeps d n naromoetda Deposits date specified date ____ stnuo cecdAarT oT rdeeviifliecdeps deif iecve ipoesTcer Credit Risk set oyNrossimorP nhos afscotnuoma nhos afscotnuoma Market Risk snaoL specified dates or cif isceetpasdro sdnoB within specified within specified stn enmitsevnI periods periods derreferkPcots (redeemable) s etcnn e e ,ghuLensqEliaeNbtCsAannP noo: liCCBsamturn te ehctlmtae auirDirwtctnnsoanCnIiF Financial Guarantees r ehovsTialcfeid h fseiavcie coeTr Credit Risk _____ sretteL fotiderC third-party defaults third-party defaults secneu q eehvssinatoCaC vliaruetDc a srhtttnn ieoLWmCEu Nr:lAtCaPsinc InaniF s.n goteiun(tPopo e lvoaiTie ccanearnif oT reviled alaicnanif Market risk Market risk stocks, interest rate instrument or cash instrument or cash Credit risk Credit risk )stcartnoc slnl oa.iCgtep(ono oT reviled alaicnanif e lvoaiTie ccanearnif Market risk Market risk ngi e,rsokfcots instrument or cash. instrument or cash Credit risk Credit risk )ycnerruc Financial Futures e rvte ic vreaaoio crtldeteernddoics-owT Market risk to both counterparties. stcartnoC financial instrument at a price to yield a predetermined rate of return. stc adrrtanworCoF de iefgi nctaa echopactsr xtdeneodcis-owT Market risk to both ngi e .rngooeF( hsca auyst(idom mloacic n taf nnoauiofma counterparties. )ycnerruC )y cnng eidtreearr nuoeicftmar reatfeoderp egnahcxe no a deificep serutuf.etad ts e enrthgoecsn taa aonrcdhtitecndxoiecs-owT Market risk to both counterparties. Interest Rate Swaps a lanoiton tnuoma fo tbed stnemurtsnihtiw different contractual interest structures (eg. fixed versus variable) secneuqe shlnsaoauCCtcartnoC -hsnttoinNwemur tlLs aEn:iNIDcAnP aniF stnenmitsevnI n osiiottag isl'broeussI tsh' grsieirdoltoH Market risk -n odN nnaommoC sdned iytvauipod receive appropriate evitalumucderreferp when declared and erahs fo dnedividdna kcots distribute residual laudiser eulavfo eulav nehw ytitnesi .ytitne liquidated. Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page 4 rtsni laicnanif fo selpmaxeP swohs 1 tibihxE fo D lena uments that represent equity interests in another entity. ton od Tyllacipyt stnemurtsni eseh ee lr dlsbuh.a atatsseyyuhnuawtedtg ifcosheo ciomlntvbyartrfIimnregeattneodc t thgtir eht sredloh eh o pro-rata shares in dividends if declared, and in the residual net assets of the entity issuing the financial instrument. Holders of these instruments typically face market risk relating to the price of the instrument. ylla n soetisnteeihmdtu arertvTsanhi n edeebtnuoc craof ta tsoc ro eht rewol fo tsoc ro tekra.meulav SEVITC EGJNBIOTR OLPAEIRCNANIF A maj ro evitcejbo fo laicnanif gnitroper si ot ,tceles erusaem dna troper etairporppa setubirtta foaicnanif l sac erutuf eht gnissessa rof lufesu sstnemele tnemetat h consequences of an entity's financing and investment decisions. Po elbiss setubirtta edulcni ,tsoc koob ,seulav ten elbazilaer seulav dna setamitse fo riaf .eulav nI gnidicedcihw h c erutuf gnissessa rof tnavealer tsom si etubirtt hsa ,swolf ta tsael owt lac isteicrncere fnfeiedwt elbaicsntanneimfurtsni ton era seitiliabail dna stessa rehto dn able. First, financial instruments as defined, and as shown in Exhibit 1, include uoma dnoyeb sessol gnitnuoccam erutuf ni tluser nac taht smeti yna nts reportable on the balance sheet using traditional rules of gnitnuocca .tnemerusaem roF ,elpmaxe eht reussi fo a tup noitpo no a kcots nac niatsus sessol dnoyebna y eht htiw noitcennoc ni dedrocer yllaitini stnuoma teerhs ecnalab detale transaction, and the counterparties to an interest dtes dodf r .cnoeeospoh hceaytgteswenrssbiotln un o iecp atcantaawasrscus Tnereffid lacitirc rehto eh ec si taht eht erutuf hsac secneuqesnoc fo laicnanif stnemurtsni era syawlayltcerid r lae ized via transactions in organized securities markets (if traded) or through settlement at predetermined amounts w etnuoc tcartnoc hti rparties. Financial instruments are, in fact, acquired by entities for the purpose of obtaining this direct future cash flow. This is in contrast to balance sheet items such as property, plant and equipment or warranty su rieht rof deriuqca era hclihw seitilibai ssenlufe ni gnicudorp eht sdoog dna secivres taht ekam pu eht ssenisub foeht ytitne dna esohw erutuf hsac secneuqesnoc era erofereht yllausu dezilaer hguorht eht retlif fo.snoitarepo esehT two differences seem to suggest that the relevant attributes of financial instruments for financia l reporting sesoprup dluohs eb esoht setubirtta taht edivorp information most relevant to estimating the future direct colf hsa w secneuqesnoc fo eht tnemurtsni morf elas ro tnemelttes dna eht tnemssessa fo eht stnuoma dnadoohilekil fo accounting losses from such sale and settlement. Current fair value information and the credit and market risks associated w ith a particular instrument appears to provide incremental value relevant information, over and abov e historical variables (Barth, 1994; Eccher et al., 1996). T ussi eh se desiar evoba raeppa ot eva hdetcapmi eht s'BS AsFtroffe tga nginb iistrdncrusaoedcrncpaatsrof tiderc ,eulav riaf fo stpecnoc ehT .stnemfurtsni laicnani risk and market risk dominate the recent FASB standards. The ynam ni ecnavelerri ro ycauqedani eht detpFecca evah ot sraeppa BSA s tsnees maf uco lre sathkeistou cnolfnibaoavnif rusolcsid evisavrep eht sa eulav ariaf detceles sah dn e, and in some cases, measurement or valuation basis for financial F eht yb detpoda ygetarts llarevo ehTi .stnemurtsn BSA sraep poat eb desab no eehsti mtearh,p tsreir auefsuollacvsid aytitne htiw gnol -specific information useful for measuring factors such as credit and market risk in relation to these instruments, si eht tseb approach, for now, for dealing with the quickly evolving areas of financial innovation. The icnanif ot tcepser htiw eussi gnitroper tnanimod eht si ceulav riaf fo tpecno al instruments. It is also not as easily defined .ksir tekram dna tiderac fo stpecnoc eht era s We therefore discuss fair value in some detail in the next section. Credit and market r isk are discussed in Section III, where we present an integration of accounting standards on financia l instruments. EU L R ATIFVPAOEFC NEOHCT T eh FASB defines the fair value of a financial instrument as "the amount at which the instrument could be e cx hanged in a current transaction, between willing parties, other then in a forced or liquidation sale" (FASB, 1991 par 5). It is lufesu ot terpretni siht noitinifed nihtiw eht txetnoc fo eht sevitcejbo fo laicnanif gnitroper sadessucsid nerruc edivorp ot gnitroper laicnanif fo evitcejboa eht ton si tI .evob t liquidation valuation for either an entity, assumed to eb a gniog ,nrecnoc ro rof sti laudividni stessa dna .seitilibail ehT evitcejbo si ot edivorp noitamrofni lufesui n a ssess ing the future cash consequences, of the entity's operational and financing strategies and decisions. From this fo tpecnoc larenpeg erom a ,evitcepsre ri aefula vyam eebt a gien rrirpoyoom ffrseipehrpstaaolpc rfuopn oriitaafulav and affords a means of evaluating procedures for estimating it. Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991 Allied Academies International Conference page 5 T eur fair value can be conceptualized as the actual net cash received or paid by an entity in an arms-length tno ,noitcasnar a specific date, in which the entity sells off or settles a financial instrument. Thus, the fair value of a ht a sa ,emit ni tniop yna ta ,deweiv eb yam tnemfurtsni laicnani eoretical, unknown amount, in the absence of an arms- e eb nac ,tnuoma noitcasnart-erp ,nwonknu sihT .nloitcasnart htgne xpressed conceptually in the familiar present-value :ytnia terte ec gld np lfimaromoo ucw,ssswa ol lesldaoofm VF = 3 n FC / C l)e1doM( i 0=i i i erehw VF = the fair value of the financial instrument at time i, i FC = ro deviecer eb ot hsac tten niatrec eh paid in the future sale or settlement of the financial instrument i in period i, and C = the true cost of capital to the firm in period i. i ehT tn uoma niatrec VF oM morf del 1, is equivalent to the present value of what is eventually realized in an i arms-leng th transaction involving the financial instrument, and one must conclude that the provision of relevan t lav siht gnissessa riof noitamrofn ue constitutes the primary financial reporting objective for financial instruments. In oht dlrow laer eh wever, there are uncertainties about the amounts and timing of the cash consequences, FC , slalew i a s eht eurt tsoc fo ,latipac C , taht tonnac eb ylesicerp .derusaem ,eroferehT edistuo fo a laciteroeht ,ledom eurtriaf i eulav has to be estimated for each moment until an actual transaction date, and the financial reporting problem, a s ,yl ssui oe dtitoecvutt ee baflrn itoep ag rs syen tt lthitet.u itsssatf rlsosieroiemasofbsuasial I ht n si ,thgil s'BSAF noitinifed fo riaf eulav tsum eb deterpretni sa eht noitceles fo a ralucitrap rotamitsefo true riaf eulav tuo fo ynam elbiss osprotamitse hcus( sa ecaf ,eulav dezitroma ,eulav ).cte ehT ,noitiniferdevewoh , emphas sezi the perceived advantages of using current market-determined estimates such as current selling prices . A cca ylerar hguohtl etaru ssarotcide rfpo FC , current price quotations from organized markets embody the market's i consensu s no eht niatrecnu selbairav deniltuo ni ledoM ,1 hcihw era yrev tnaveler ot eht tnemssessa fo erutufsac h srotacidni ylemit gnidivocrp yb ,secneuqesno sf eto. rnsetueeun tmglesuenamaf vavn coh oimcermh,iotovnsnolecAe nednepedni ebra srebmun hcus esuace ,d e yn eliyttmearhneti tmeei hdlsten odiete a nenf vioerimcotrnfceaetljeabdbus ibarapmoc dna ytilibailer enimredsnu taht seulav teeh e d esiorrvso oolf ftraeeroa pruimdelaie hafts.tvsayebt-it lekraM discipline in financial reporting. esehT noitamrofni ,scitsiretcarahc ecnaveler evitciderp( ,)eulav ytilibailer ,)ytilibaifirev( dnaytilibarapmoc appear to be the c airetir desu yb eht BSAF ot knar redro sti tsil fo elbatpecca riaf eulav ,srotamitse hcihwra e summarized .woleb ehT gniwollof riaf eulav srotamitse era permitted by all the standards on financial instruments dessucsid ni siht .repap yehT era ylfeirb dessucsid ni eht redro fo ,ecnereferp de tya bc eiBhdStn Ai nFSi.A7F0S1 .stnemu rlt assinec isn sfsa euo anytorlitai ocfi mr sfeflria dtou iitvsenl nbasiwe a yoifehomevsbsTlmhialoteocff SSDE NET ROSAEII AMUATTNBILFAEOTATKSVOREUAQM S nanif emo cial instruments are regularly traded on organized auction or over-the-counter markets. Quoted ferehtm era stnemurtsni eseht rof secirp tekra elb ayn lloeilraaov u aa sysuliisa adnbi e hmst rr,oe gf lfnyaoilesidoaldc ram esehT .secirp tniobp-dim relaed ro ksa dna di tek secirp era eht tsom derreferp setamitse fo riaf eulav roflaicnanif ,susnesnoc tekram desaibnu eht tneserper yeht esuacieb stnemurtsn at any point in time, about all the variables outlined in Model 1 for a unit of a financial instrument. Also, the gnitl udseetrr ospeetramitse fo riaf eulav morf ehtdetouq secirp. eelrbaaifirev STN UDOEMD ARD OENSCSOEEATRBAM IET USRLEIAAVF s erutuf a morf swolf hsac eht gnidnuorTrus ytniatrecnu fo eerged eh ale or settlement of a financial instrument si directly related to the expected length of time to a planned transaction date. As the time horizon shortens, these arusaem ylraelc erom emoceb ruo hsinimid seitniatrecn ble. Thus, for certain financial instruments originally recorded at their future contractual settlement dety a be,m ru)inilexaa alocfevbrbapvpiaecer/ e hls cb tsuasnesyaut(aoopmna Proceedings of the Academy of Accounting and Financial Studies, Volume 2, Number 2 ,iuaM ,iiawaH7991
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