BE130: Accounting - Lecture Programme

Teaching Staff

• In Autumn Term, the module leader is Dr Osamuyimen Egbon (Osa) and Dr Teng Li
• In Spring Term, the module leader is Prof. Henry Agyei-Boapeah and Dr John Azure

Lecture Programme

• Week 2 includes the introduction to fair value accounting
• Week 3 includes a critical perspective on fair value accounting
• Week 4 covers foreign currency translation (1)
• Week 5 covers foreign currency translation (2)
• Week 6 covers corporate social responsibility (1)
• Week 7 focuses on corporate social responsibility (2)
• Week 8 asks and attempts to answer, "What is Accounting?"
• Week 9 covers the politics of accounting standard setting
• Week 10 covers accounting theory and critical accounting
• Week 11 covers reconceptualizing accounting and alternative approaches

Teaching Delivery

• BE130 is a 20-week (30 credits) module
• In the Autumn Term, there will be two-hour lectures (weeks 2 -11) and one-hour fortnightly classes/seminars (weeks 3-16)
• Classes take place on a fortnightly basis
• Attendance is required at each of the lectures and assigned classes

Seminar, reading, preparation, and individual work

• Preparation before class is required
• Revision after class is required
• Reading is required, including handouts and module information
• Homework include example questions are required
• Speaking and participating in class is required

Advice

• Be proactive, not passive
• Prescribed reading is vital
• Manage yourself and take responsibility for your own learning
• Self-motivated students do best
• Efficient time management is essential
• Awareness of current issues through press reading is important
• Consult primary sources such as journal articles

Module Details

• The full BE130 Module is assessed by a 3-hour final examination in May/June 2025 and two pieces of coursework
• Two pieces of coursework are weighted 20% and 10% respectively
• The final mark is based on 70% examination mark and 30% overall coursework mark
• If Coursework aggregate <40 and exam mark is 40 or above, and the module aggregate failed, reassessment in coursework is required to be re-aggregated with exam mark to create new module aggregate
• If Coursework aggregate is 40 or above and an exam mark < 40, and module aggregate failed, reassessment in the exam is required to be re-aggregated with the coursework mark to create a new module aggregate
• If both Coursework aggregate and exam are <40, reassessment in coursework and exam is required to be aggregated to create a new module aggregate
• The Autumn Term coursework consists of one piece of coursework that counts for 20% of the term's weighting
• Do not plagiarize
• Read both the textbook and the material on Moodle
• Preparation for classes is required

Intro to Fair Value Accounting

• The lecture objectives are to understand IFRS 13 Fair Value (FV) definition, describe the basic context of FV determination and describe further considerations specific to non-financial assets, liabilities & an entity's own equity, and financial instruments
• Other goals are to understand the fair value hierarchy, discuss the valuation models, and describe the disclosure requirements.

IFRS 13

• Measurement is determining monetary amounts at which financial statement elements are recognized in the balance sheet and income statement
• This process involves selecting a specific measurement basis and possible measurement methods in accounting.
• Historical Cost, replacement cost (entry price), exit (current selling) price, which is a basis for FV are all examples of possible measurement methods in accounting
• Fulfilment (settlement) Value and Present Value / Value in Use are also measurement methods in accounting
• Current accounting practice uses a combination of historical cost and FV, with valuations/measurements shifting towards FV

Need for IFRS 13

• More than 20 IFRS/IAS require or permit FV, for example, on assets, liabilities and financial instruments
• A unified generic framework defines and determines FV
• IFRS 13 provides general guidance on HOW to determine FV, rather than WHEN it can and should be used
• Other standards address the "when" question.

IFRS 13 Definition and Context

• The IFRS 13's 'Fair Value Measurements' Defines FV, provides guidance on FV determination, outlines general principles, introduces FV hierarchy for all items, and provides comprehensive disclosure rules.
• IASB's previous definition of FV was the amount an asset could be exchanged for, or a liability settled, between knowledgeable willing parties in an arm's length transaction
• Fair Value defines price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

IFRS 13 Key Points

• Price is the price at which an item could be disposed (Exit price)
• Orderly transaction describes when it is not forced or by liquidation
• Market participants describes the market-based measure and market price
• Measurement date describes knowing the current price, and applies to both initial and subsequent measurements

Exit Price Principle

• FV is the exit (selling) price for a particular asset or liability/equity
• FV looks at from the perspective of market participants
• Market participants are assumed to hold the item at the measurement date
• FV is not affected by the entity's intentions towards the item being valued

Market-Based Measurement

• FV is a market-based measurement, rather than entity-specific measurement

Orderly Transaction Principle

• A transaction is orderly if not forced (liquidation or distress)
• In an orderly transaction, parties are willing to trade rather than desperate to get cash due to liquidation/distress
• Orderly transactions have adequate marketing period and need to happen regularly

Market Participants

• Market participants are buyers and sellers in the principal market
• They are independent of each other, knowledgeable, and sufficiently informed, able to enter into a transaction with sufficient funds, and willing to enter, motivated but not forced

Asset/Liability Characteristics

• Only item-specific characteristics market participants consider are relevant
• These include condition, location, and restrictions on sale or use
• These characteristics influence market participants' pricing decisions
• Entity-specific characteristics or entity's use intentions are irrelevant in FV determination

Location Example

• Company A is valuing a crude oil stock held in the Arctic circle
• Company A should determine the current price for crude oil based on principal market prices
• Prices should be adjusted for the costs to transport the asset to that market

Transportation Costs

• FV includes Transport costs, costs to current its current location to the market
• Transport costs are relevant to FV because location is a characteristic of an item
• Examples include export market, location specific
• Do not confuse transportation costs with transaction costs, which are not included with FV
• Commissions charged by agents are transaction costs
• Transportations costs aren't characteristic of an asset, and don't affect FV

Restrictions

• If there is any restriction on sales, consider whether these restrictions would apply to the market participants
• Owner (holder) specific restrictions do not affect market participants' valuations, so they do not affect FV
• Asset-specific restrictions affect market participants' valuation decisions, they do affect FV

FV Implementation Process

• Determine the subject of valuation, and whether it is an asset, liability, own equity or a combination of these
• Determine the principal / most advantageous market, identifying markets for the asset or liability and determining the principal market
• Determine the 'highest and best use' of a non-financial asset, only applicable to non-financial assets
• Decide on valuation hierarchy and assumptions, choosing a valuation model and working out inputs if level 2 or 3 inputs are used
• Make appropriate disclosure, ensuring full quantitative disclosure and sensitivity analysis

Valuation Assets, and Liabilities

• The item being valued could be a stand-alone asset or liability, or it can be a a combination (a group) of assets and/or liabilities
• PPE, intangible assets or equity instruments can be examples of the above
• The Unit of account includes the level at which the asset or liability is aggregated or disaggregated
• It is determined according to the relevant IFRS

Principal Market Assumption

• The assumption is that the (hypothetical) transaction takes place in the principal market with the greatest volume and level of activity for the asset or liability
• If no principal market, the transaction occurs in the most advantageous market
• The most advantageous market maximises the amount that would be received to sell the asset or minimizes the amount to transfer liability, after adjusting for transaction and transportation costs
• Since transaction costs are included with FV, the most advantageous market does not necessarily result in the highest FV
• FV is estimated net of transportation costs as location is characteristic of the asset/liability

Further Considerations

• Further considerations specifically regarding the Application to non-financial assets, application to liabilities and an entity's own equity, or application to financial instruments

Highest and Best Use

• The highest and best use of non-financial assets must be physically possible, legally permissible, and financially feasible
• If any criteria are not met, then the use is not considered in valuing the asset
• Market participants' use is important to consider, even if the entity's use intention is different

Liabilities and Equity Instruments

• FV of a financial and non-financial liability or an entity's own equity instruments is determined based on the assumption that the instrument would be transferred to a market participant and would remain outstanding
• Quoted prices for liabilities and equity instruments aren't always available, particularly first time of issue
• The quoted price reflects exit price for investors, rather than the issuers, so FV is measured from the perspective of other parties that hold them as assets

Financial Instruments

• What are financial instruments? any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity" (IAS 32)
• Financial Assets are cash, receivables, investments, and derivatives (options)
• Financial Liabilities are payables and derivatives
• Equity instruments are an ordinary share of a company

Offsetting Positions

• Entities might hold financial assets and liabilities to manage a particular risk exposure - offsetting is allowed

Valuation

• The Fair Value hierarchy has to do with valuation models

FV Hierarchy

• Three levels of FV hierarchy exist
• Level 1 is Observable market inputs, unadjusted quoted prices for identical items in active markets (equity prices from the London Stock Exchange)
• Level 2 is Observable inputs not included in Level 1, quoted prices for similar items in active markets, prices for identical items from inactive markets, other observable inputs than quoted prices (interest rates, yield curves, credit spreads, historic empirical correlation)
• Level 3 is Unobservable inputs (firm's own data), uses the internal model, with financial forecasts and historical volatility

Valuation Models Principle

• Select an appropriate valuation method that maximises the use of relevant observable inputs, minimises the use of unobservable inputs, is appropriate based on circumstances, and have data
• Valuation method and techniques are consistent with the objectives of valuation and accounting policies

Valuation Methods Groupings

• Three groups of Valuation methods exist: market approach, income approach, and cost approach.

Market Approach

• The market approach uses prices & other information generated by market transactions involving identical or comparable items, assets, liabilities, or a group of assets & liabilities (such as a business)

Income Approach

• The income approach converts future expected amounts (cash flows or income & expenses) to a single current amount by discounting, for example, present value techniques

Cost Approach

• The cost approach reflects the amount that would be required to replace an asset - current replacement cost
• It is applicable mainly for non-financial assets

Valuation Hierarchy

• Quoted shares in a company traded on exchange is a level 1, 2 or 3 hierarchy
• Unquoted shares for which earnings multiple from listed competitors that level 1, 2 or 3 hierarchy
• Bonds traded w/infrequent prices, the hierarchy is a level 1, 2 or 3
• A investment value property using observable price is a level 1, 2, or 3 hierarchy
• Unquoted shares in private company the earnings with unobservable input is, level 1,2, or 3

Disclosure

• There are particular disclosure requirements

Disclosure Required for FV

• IFRS 13 includes disclosure requirements related to timing, recurring or non-recurring, the level within valuation hierarchy, transfers are the hierarchy, and the impact of FV on the financial position & performance
• prices at Level 1 are more reliable, the subjectivity is increased as levels two and three levels are in use
• Increased disclosure needs to occur for Level 2 & 3

Valuation Timing

• Recurring FV valuations are undertaken at the end of each reporting period on financial instruments
• Non-recurring FV valuations are undertaken only at some point, for example, on a PPE or re-evaluation to building a factory or with impairment write-downs

Level 3 Disclosure

• More information is required on explaining the inputs of Level 3 FV measurements, the description of the valuation technique used, and the quantitative measures of the unobservable inputs and assumptions that are used
• The sensitivity of the FV to changes in unobservable inputs and inter-relationships between those inputs that magnify or mitigate the effect on the measurement.
• Disclose assumptions made when valuation models are used
• Additional disclosure is required when the volume/level of activity have significantly decreased

Recognition Differences

• The transaction price might not equal FV, because FV is based on an exit price concept and the transaction price is an entry price concept
• Most cases the FV = TP (Transaction price)
• In some circumstances, Fair Value doesn't equal transaction price: Transaction is between related parties and price is forced upon or from a liquidation transaction.
• The Unit of account and whether the market is consistent with the principal and advantageous market needs to be considered
• In such cases, the difference is recognized as Day 1 Profit/Loss

Summary

• In Summary, the study notes define the basic context for FV determination and the applications specific to non-financial assets, liabilities and own equity, and financial instruments, different valuation models, the disclosure requirements.