An analysis of fair value financial statements in relation to their relevance and reliability to investors. A case study of Plus Five Pharmaceuticals
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The study sought to analyze fair value financial statements in relation to their relevance and reliability to investors. The research was undertaken as a case study of Plus Five Pharmaceuticals. The study analyzed the effects of fair values to investors’ decision making, identifying risks and benefits associated with the use of fair values, investigated how fair value accounting has affected auditors’ performance on their work and examined how the use of fair value contradicts with other accounting principles. Descriptive research design was used to collect data. Data was obtained through interviews and questionnaires and was presented in form of graphs, tables and pie charts. Using a sample of investors, accountants and auditors, the researcher found that fair value financial statements are relevant and reliable to investors because they reflect current market conditions and increases the transparency of the impact of market forces on financial information and they are more accurate, timely and comparable across firms’ positions as compared to historical cost measurement value because fair value reflects the effects of changes in market conditions when they take place and provide superior basis for prediction than outdated cost figures. The researcher also found out that there is a high risk of management using improper amounts for cash flows, manipulating the timing of future cash flows or using inappropriate discount rate resulting in an inaccurate present value. Therefore the researcher concluded that the use of fair values in the financial accounts of companies has been a positive change in accounting. It has enhanced the use of financial statements as the basis for investment decision-making. However the researcher recommended that there is need to involve auditors in the calculation of the fair values. Thus auditors will have to be able to technically arrive at the fair values and thus be able to effectively assess the financial statements and whilst reducing the audit risks.