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Talks on the Fair Value Introduced in the China New Accounting Standards

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[Abstract] This paper firstly gives the concept of fair value and its application environment, and then analyzes the fair value in the new standards specifically. Finally in combination with the concrete background in China, we put forward some advices on the carrying out of the fair value in the accounting practice.

[Key words] Fair Value; China new accounting standard

Since January 1, 2007, the China new accounting standards will become mandatory for listed Chinese enterprises. The adoption of the new China accounting standards system brings about substantial convergence between Chinese standards and International Financial Reporting Standards (IFRSs), as set by the International Accounting Standards Board (IASB). One of the most important introductions is the fair value measurement.

IгЂЃFair Value and its application environment.

Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.

The imprecation of the Fair Value is limited to the market environment.

1гЂЃActive market

2гЂЃFair trade

If there is active market, which is as fair value generally considers input value reflects fair value for replacement cost. Consider the transaction value to reflect the current fair market value; if there are not active markets, and it’s not easy to find similar assets or similar asset’s active markets, the present value of future cash flow will be featured playing fair value.

IIгЂЃFair Value in the China new accounting standard

The new accounting standard system, Accounting Standards for Business Enterprises (ASBEs) consists of a new Basic Standard and 38 Specific Accounting Standards. Among these standards, there are 17 places which are connected with the Fair Value, and in these changes, Investment property, Business Combinations, Financial Instruments and Exchange of non-monetary assets are affected greatly.

1гЂЃInvestment property

Investment property is property (land or a building - or part of a building - or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes;


(b) Sale in the ordinary course of business.

In the ASBE No.3”Investment property”, Except as set out below, Investment property are accounted for using the cost model in the same way as fixed assets.

If there is clear evidence that the fair value of an investment property can be reliably determinable on a continuing basis, the fair value model may be used.

If the fair value model is used, no depreciation or amortisation is provided. The difference between the fair value and the carrying amount is recognised directly in profit or loss, as “Fair Value gain or loss” account to the income statement.

At the background of increasing property price in China, particularly in some big cities such as Shuanghai, Beijing and Guangzhou, the enterprises who put the property to lease instead of sale, and have the property with a increasing price anticipate, will benefit from the new accounting standards during a period.

The Fair Value model does reflect the real value of a property over the historical cost model. For example, a company constructed an office building at a cost of пÑ--Ґ3,000,000 in 2002, but 5 years later, in 2007, it has been worthy of пÑ--Ґ6,000,000. The historical cost measurement can not measure properly.

2гЂЃBusiness Combinations

A business combination is the bringing together of separate enterprises into one economic entity as a result of one enterprise uniting with or obtaining control over the net assets and operations of another enterprise.

There are two methods about the arrangement of accountant in the merging of enterprises accepted internationally: purchase and rights and interests gathering (the rights and interests joint). According to the new accountancy rule, Business combinations are classified into the business combinations under common control and the business combinations not under common control.

Fair Value affects primarily the business combinations not under common control.

The ASBEs No.20 requires an acquirer to allocate part of the cost of a business combination to the acquiree's contingent liabilities at fair value (provided their fair value can be measured reliably) at the acquisition date. The acquirer shall, on the acquisition date, measure the assets given and liabilities incurred or assumed as consideration for a business combination at their fair values, and shall record the differences between them and their carrying amounts in the profits and losses of the current period.




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