In The Name Of Fair Value
In The Name Of Fair Value
In The Name Of Fair Value
In today's markets when one wants to buy or sell a commodity/asset, the first question that comes up is how much is it? What the seller or buyer is interested in, is the value of the asset "at today's price" regardless of what the price was before or could be later. Not many people are interested in historical costs anymore. The same goes for the Financial Accounting Standards Board; they believe fair value measurement is more relevant to users than the historical costs as it reflects a fair price in the event the quoted market price is not available. In 2005 the FASB added to its agenda a project on how to clarify the meaning of "Fair Value" and in support of their research in 2008 an amendment was announced by SEC Chief Accountant together with FASB, stating the new meaning of "Fair Value" and which assets or liabilities can be recorded using the fair value measurement when preparing financial statements.
Now, under the Generally Accepted Accounting Principles, fair value of an asset means, the amount at which the asset could be bought or sold in a current transaction between willing parties, other than liquidation. The fair value of a liability is the amount at which the liability could be incurred or settled in a current transaction between willing parties, other than liquidation. If available, a quoted market price in an active market is the best evidence of fair value and should be used as basis for the measurement. In the event that the quoted market price is unavailable, the accountant makes an estimate of fair value using his judgment and the best information available.
While using fair value might be favorable in most cases, the information that reveals market prices is not always available. In the case scenario I am about to present below, the quoted prices have undergone extensive unfortunate economic hardships that make it difficult to comprehend the circumstances currently occurring.
Normally when one puts money towards pension there is an expectation of financial independence when the pension comes to maturity. According to the South African Business Report, the Zimbabwean pensioners who hold policies at Old Mutual Zimbabwe are being paid US$20 a month (less than the universal poverty line of $1 a day). Zimbabwe used to be one of the richest countries in Africa; however, in the past twelve years the country has undergone a tremendous economic collapse. Since 2009, the Zimbabwe dollar was suspended due to severe hyperinflation, the country adopted the United States dollar and the South African rand as the official currencies. With all these economic upheaval phases, depreciations in assets and adverse exchange in currencies, one can assume OMZ determined the pension disbursement values using the fair value measurement. When the pensioners initially started paying for their policies no one anticipated the economic meltdown. Neither did OMZ expect to such economic turmoil. However, companies are there to make money, be competitive and to stay afloat. OMZ serves 200,000 pensions of which approximately 80,000 are being paid from US$20 and a few that are paid up to US$2,000 a month depending on what was initially invested.
Looking at the decline in value of pensions, So many questions come to mind, with the assumption that OMZ acted according to the GAAP regulations. It is also understandable the pensioner is not a willing party in this current state of pension affair. The US$20 is now what was converted from the devalued Z$ and it is a fair value measurement of what the price of pensions are worth today, not what was initially estimated. It is apparent that the Zimbabwe dollar devaluation, caused by the economic turmoil is causing severe financial struggle to pensioners. While the future of the pension disbursements is unknown, the current price continues to be influenced by the past and is valued at today's fair value. Looking at the historical costs of some of those pensions, let's say a pensioner who started investing in the 1990s when the currency exchange was US$1 to Z$1.59, wouldn't these pensioners wish to go back in time and earn what their pensions were once worth? Isn't it worth considering historical costs and rendering the values as they where?
Zimbabwe does not have a Securities Exchange Commission at present; neither are they registered under the International Financial Reporting Standards. However, accountants follow International Accounting Standards Board regulations. Ethics of financial accounting in a country that has and still is undergoing an economic meltdown seem to encounter business dilemmas which the outside investors and interested observers question. There is no doubt the pensioners are helpless in this situation, however pensions still had to be disbursed at fair value. In business, maximization of profits is the fundamental name of the game. OMZ is striving in very difficult economic circumstances. For the accountant, "doing the right thing" is not an easy task. The GAAP (Generally Accepted Accounting Principles) still have to be followed, but to what extent are these principles being followed, and to whose advantage? The decline in value of pensions at OMZ and the use of fair value measurement proves to benefit only the company and leaves the pensioner disgruntled.
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