Fair Value Measurement and
performance on selected manufacturing companies in
Nigeria
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:
i)
To examine whether fair
value measurement increase performance on selected manufacturing companies in
Nigeria.
ii)
To examine the benefits
of fair value measurement to the manufacturing companies in Port Harcourt.
iii)
To examine fair value
measurement and performance in selected manufacturing companies in Nigeria.
iv)
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:
i)
Does fair value
measurement increase performance on selected manufacturing companies in Nigeria?
ii)
What are the benefits
of fair value measurement to the manufacturing companies in Port Harcourt?
iii)
Does fair value
accounting an appropriate tool to measure value for manufacturing companies in
Nigeria?
iv)
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
Ø
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.
Ø
MARKET
VALUE: this is the value of an asset if it were
to be sold on the open market at its current market price.
Ø
FAIR
VALUE MEASUREMENT: This means that fair
value would reflect the conditions that exist at the balance sheet date.
Ø
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.
Ø
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.