Fair Value Measurement And Performance On Selected Manufacturing Companies In Nigeria

Project and Seminar Material for Accountancy / Accounting

Chapter One

Introduction

1.1 Background of the Study

According to FAS 157 define fair value as the 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. This definition of fair value reflects an ideal “exit value” notion in which firms exit the positions they currently hold through orderly transactions with market participants at the measurement date, not through fire sales.

At the measurement date means that fair value should reflect the conditions that exist at the balance sheet date. Barlevy (2007) noted that if markets are illiquid and credit risk premium are at unusually high levels at that date, then fair values should reflect those conditions. In particular, firms should not incorporate their expectations of market liquidity and credit risk premium returning to normal over some horizon, regardless of what historical experience, statistical models, or expert opinion indicates.

To enhance performance and determine the magnitude of measurement, the usefulness of accounting information about an enterprise increases greatly if it can be compared with similar information about other enterprises and with similar information about the same enterprise for some period or some other point in time (FASB, 1980). Comparability addresses comparing information among different entities while consistency addresses comparing information over time for the same entity. Different firms may use different accounting principles making comparison among firms, even within the industry, difficult at best. Fair Value Accounting (FVA) does not ease the comparability problem and likely exacerbates it. Fair Value Accounting (FVA) also has a significant impact upon consistency. When the market financial assets declined precipitously and the valuation inputs change overnight, it is impossible for the information to be consistent.

Fair Value Accounting (FVA) seems to result in a situation where comparability and consistency are more compromised than in the traditional accounting model. An “orderly transaction” is one that is unforced and unhurried. The firm is expected to conduct usual and customary marketing activities to identify potential purchasers of assets and assumers of liabilities, and these parties are expected to conduct usual and customary due diligence.

However, since the major objective of any business (manufacturing companies) organization is to make profit and continue in business, what they face in the course of doing their business and the method of accounting they use in reporting their profit may make this noble objective to be unrealistic particularly during inflationary period.

1.2 Statement of the Problem

Recent market price conditions have resulted in large write-downs through the application of fair value measurements. Most of the charges have occurred within the manufacturing companies and other industries. Companies providing credit protection through credit default swaps on the underlying asset, as opposed to insurance contracts, have been impacted by fair value measurements. Even though the default that would trigger protection may not have occurred, companies are required to recognize unrealized losses on the contract when the fair value of the underlying assets has significantly decreased. Also affected have been some corporations with investments in auction rate securities which suffered declines.

The requirements to use fair value measurements have been criticized for producing inaccurate results in the unusual market conditions recently experienced. Such results, it is argued, hurt the company in the long run. If a company must record losses in such an environment, critics claim, it signals bad news to investors that may ultimately be misleading.

Therefore, they say, it is preferable to record only realized gains and losses. In considering this controversy, it is important to recognize that accounting principles such as fair value are developed with the objective of providing information that will best serve the interests of investors, businesses and policy makers over the long term. This study tries to investigate whether fair value accounting is an appropriate tool used in measuring market value for manufacturing companies in Nigeria.

1.3 Objectives of the Study

The objective of this study is to find out the following:

To examine whether fair value measurement increase performance on selected manufacturing companies in Nigeria.
To examine the benefits of fair value measurement to the manufacturing companies in Port Harcourt.
To examine fair value measurement and performance in selected manufacturing companies in Nigeria.
To determine whether fair value accounting is an appropriate tool used to measure value for manufacturing companies in Nigeria.

1.4 Research Questions

The following research questions were formulated to guide this study:

Does fair value measurement increase performance on selected manufacturing companies in Nigeria?
What are the benefits of fair value measurement to the manufacturing companies in Port Harcourt?
Does fair value accounting an appropriate tool to measure value for manufacturing companies in Nigeria?
Does fair value measurement enhance performance in selected manufacturing companies in Port Harcourt?

1.5 Research Hypotheses

Hypothesis 1

H0: There is no significant relationship between the benefits of fair value measurement and selected manufacturing companies in Port Harcourt.

Hypothesis 2

H0: There is no significant relationship between fair value measurement and increase in performance on selected manufacturing companies in Nigeria.

Hypothesis 3

H0: Fair value measurement does not enhance performance in selected manufacturing companies in Port Harcourt.

1.6 Significance of the Study

This study would be of significance to the following:

It would help the management of selected manufacturing companies on the assets to be measured and the best price to transfer it for.
It will also be of immense benefits to the professional accounting bodies such as ICAN, ANAN, etc.
It would also help the employers, employees and the potential investors who may want to invest on the company.
Finally, it would serve as a reference source to students or other researchers who might want to carry out their research on the similar topic.

1.7 Scope of the Study

The study concerns about fair value measurement and performance on selected manufacturing companies in Nigeria with a particular reference to Selected Manufacturing Companies in Port Harcourt which includes Explosive and Plastic Company Limited, New China Rubber & Plastic Footwear Industry Limited and Nexans Kabelmetal Nigeria Plc.

1.8 Limitation of the Study

The limitation of this study was inability of management to divulge certain information which they consider sensitive and fear of publication which might be detrimental to their operation.

Another limitation to the study is time constraint; the period within which the study is conducted is short for a thorough research work, hence gathering adequate information becomes very difficult.

Also, finance is one of the limitations to study; the researcher is facing financial constraint to meet the all the needed educational requirements including this research study. This caused the researcher to restrict his research to few companies in Port Harcourt for possible completion of the study.

Also, the outright inability of some respondents to complete and return the questionnaire to the researcher is one of the limitations of the study. Another limitation to the study was traffic congestion for the researcher to meet them in their offices and for possible return of the questionnaire.

Finally, lack of materials on the topic; this is totally new in the area fair value measurement and performance on selected manufacturing companies in Nigeria. Therefore, the researcher resolved to seek friendly approach in order to obtain the needed materials or information from the organization under study through the administration of questionnaire.

1.9 Definition of Terms

Fair Value:

This is define as the 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.

Market Value:

This is the value of an asset if it were to be sold on the open market at its current market price.

Fair Value Measurement:

This means that fair value would reflect the conditions that exist at the balance sheet date.

Manufacturing Firms:

They are the companies concerned with the production of goods and services made available to consumers with raw materials as their primary inputs.

Management:

This is defined as a process (both social and technical that utilizes resources and changes human behaviour in the desired direction in order to produce contributions accomplishing the organization objectives.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Introduction

This chapter presents summary, conclusion and recommendations for further studies.

5.2 Summary

This study was carried out to examine fair value measurement and performance on selected manufacturing companies in Nigeria using Explosive and Plastic Company Limited, New China Rubber & Plastic Footwear Industry Limited and Nexans Kabelmetal Nigeria. Therefore, to achieve the above objectives, the study revealed that:

Table 2 shows that 55(58%) of the total respondents pointed “Yes” while 17 of the respondents representing 18% opted “No”. Also 23(24%) respondents asserted “No Idea”. It was discovered that fair value measurement increases performance on selected manufacturing companies in Nigeria.

Table 3 above shows that 12(13%) of the respondents indicated it reflect current market conditions, and 15 respondents representing 16% pointed it is more transparency while 10(11%) asserted reliability in illiquid markets.

Another 7 of the respondents (7%) opted market earnings introduces uncertainty while 51 respondents representing 53% indicated all of the above. It was observed that there are benefits of fair value measurement to the manufacturing companies in Port Harcourt.

The table 4 shows that 85 of the respondents representing 89% indicated “Yes” that fair value accounting is an appropriate tool to measure value for manufacturing companies in Nigeria while 10(11%) respondents pointed “No Idea” on the question. It was discovered that fair value accounting is the most appropriate tool to measure value for manufacturing companies in Nigeria.

Table 5 shows that 60 (63%) of the respondents that indicated “Yes” that fair value measurement enhance performance in selected manufacturing companies in Port Harcourt. Also, 15 (16%) respondents pointed “No” while 20 respondents representing 21% asserted “No Idea on the question. It was observed that fair value measurement enhances performance in selected manufacturing companies in Port Harcourt.

5.3 Conclusion

Although it has generated controversy, fair value continues to represent the best available methodology for determining and reporting the value of financial instruments. Markets naturally respond to financial information that fair value provides. The impacts of such measurements, whether positive or negative on a given company are the results of market forces, not accounting methodologies. When market conditions result in volatility in values and earnings, investors benefit when companies transparently report on these circumstances and their impact on financial reporting.

5.4 Recommendations

Based on the findings of this study, the following recommendations were made by the researcher:

Accounting bodies in Nigeria should organize workshops for the accountants and managers of companies to create enough awareness on current cost accounting and the need to depart from the historical cost accounting method during inflationary period.
Companies should prepare their financial report using both historical cost and fair value (current cost) methods simultaneously. This will allow the companies to know the true financial position of their companies before declaring dividend and other benefits.
The Securities and Exchange Commission of Nigeria should make current cost statements a precondition for filing annual returns in the commission. The submission of accounts and financial statements adjusted for effects of price changes should be made one of the conditions for firms to be listed in the stock market.
This action will fairly protect the interest of investors especially in periods of rapid price changes.
The managers of these companies should always seek to know the market value of an asset before being measured out.

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