From Historic Cost to Fair-Value: Is the Transition Worth It for Developing Countries?

As the International Financial Reporting Standards (IFRS) continues to expand their principles across the globe, barriers to implementation to are to be expected, particularly in developing and third-world countries. Dr. Mohammad Nurunnabi, researcher for the Advances in Accounting Journal, acknowledges that, “the accounting practices of a country are highly influenced by cultural forces. This is because accounting is a product of its environment and a particular environment is unique to its time and locality” (Blodgett et al., Qtd. In Nurunnabi 136). One IFRS principle in particular that showcases this conflict between cultural forces and the accounting environment is the debate between historical cost accounting (HCA) and fair-value accounting (FVA). In these developing countries, some barriers to overcome in order to utilize fair-value accounting include the lack of continuing professional education for financial authorities and auditors as well as the instability of the markets, which brings into question the accuracy and verifiability of ending fair- value approximations.

In any developing country, education is often at a disadvantage because of limited funds and resources, as well as the general cultural predisposition towards institutionalized education. Dr. Jayanthi Kumarasiri and Richard Fisher, researchers for the International Journal of Auditing, found in their research that, “many developing countries face a shortage of skilled property valuers [sic], actuaries and other specialist appraisers. Reporting entities face an impossible situation in that they do not possess the skills to estimate fair values ​​in-house and those skills are not available externally (Kumarasiri 71). These cultures may not place an emphasis on continuing education as research and principles advance, or more likely, they may simply not have the funds and technology to educate their accountants in order for them to properly estimate fair-values.

So why is this an issue? Fair-value accounting, as opposed to historical cost accounting where accountants can simply record the cost at the value they bought an asset at, requires both an active market and estimations of what the value currently is of that asset in order to better inform stockholders and creditors on financial statements. For example, “situations in which observable market-based inputs, such as quoted prices, are not available, fair value must be estimated using internal estimates and calculations – sometimes referred to as a mark-to-model approach” (Kumarasiri 67). In a developing country where the market is often inactive, accountants would be required to perform complex and intricate calculations in order to provide fair-value estimates. In addition, once the accountant calculates the value of the asset (which may or may not have been done correctly), the auditor then needs to verify the information. Kumarasiri and Fisher write, “Auditors believe that FVA is more challenging than HCA due mainly to difficulties in the verifiability of such information. Specific challenges of concern to Sri Lankan auditors include lack of auditor knowledge and the prevalence of inactive markets” (Kumarasiri 82) . If the accountants and auditors do not have the necessary education required to understand and implement fair value accounting effectively, the results could be disastrous for the economy and stock market.

First-world countries have made efforts to influence developing countries, teaching them new education systems and accounting principles. Is this effective? In an article published about IFRS adoption in Egypt, authors Wallace and Briton write, “The biggest problem developing countries have is that of too many foreign 'experts' marketing half-baked solutions to problems that neither they nor the recipient nations understand” (Wallace and Briston qtd. in Kholeif 31). Because of the complexities of fair-value accounting, it seems that the amount of education required for both the accountants and the auditors in order to implement the principle far outweighs the benefits of a more market-based costing system.

It seems like the struggle of adapting fair-value accounting is a never-ending circle: developing countries do not have enough education, so they cannot provide accurate estimations; the education they need is often too highly priced and confusing, and so the accounting principles are then misapplied. What can be done to solve this conundrum? Kumarasiri offers one last piece of advice when he writes, “the most effective means for facilitating knowledge transfer in developing countries needs to be urgently addressed. Researchers could also consider the role of technology, such as decision aids, in facilitating this process” (Kumarasiri 83). This is where information systems and internal controls could come in handy for these developing countries. As technology advances and becomes more available and cost-effective, developing countries could begin to utilize decision aids and information systems that help calculate fair-value and that are easily traceable for auditors to verify. In addition, it is essential that these individuals receive the proper education on IFRS and its principles in a way that is easily understood in order to properly incorporate these standards for effective use.

Works Cited:

Kumarasiri, Jayanthi, and Richard Fisher. “Auditors' Perceptions Of Fair-Value Accounting: Developing Country Evidence.” International Journal Of Auditing. 15 (2011): 66–87. Business Source Complete. Web. 8 Oct. 2015.

Nurunnabi, Mohammad. “The Impact of Cultural Factors on the Implementation of Global Accounting Standards (IFRS) In a Developing Country.” Advances in Accounting 31.1 (2015): 136-149. Science Direct. Web. 8 Oct. 2015

Kohleif, Ahmed. “A New Institutional Analysis of IFRSs Adoption In Egypt: A Case Study of Loosely Coupled Rules and Routines.” Accounting in Asia . Research in Accounting in Emerging Economies Vol 11 (2011). Print.

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