Economic units use the principle of historical cost as a prevailing principle for accounting measurement, then there are those who call for the use of fair value accounting, such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), through the issuance of many accounting standards that focus on the use of fair value in Accounting measurement, and the fair value of assets and liabilities reflects the current market conditions, and thus the availability of information in a timely manner, which leads to increased transparency in a way that can improve the quality of financial reporting, Fair value accounting does not only deal with recording the acquisition of assets, help them make their various operational and strategic decisions, as well as Assistance in providing the necessary information to estimate future operational, investment and financing cash flows but also looks beyond that, which are the financial risks resulting from keeping them, as investors look forward to financial information prepared on the basis of internationally recognized accounting standards. provides useful information for current and prospective users to help them make their various operational and strategic decisions.

Research Problem

The research problem revolves around the Iraqi economic units' use of the historical cost principle in accounting measurement and disclosure, and this principle is inappropriate for decision-making because of the information it provides. The historical cost principle refers to events that took place in the past, so the information is historical about those events. Looking for a better alternative that fits the changing economic conditions accompanying the contemporary business environment.

Research Objectives

The research aims to address the concept of fair value accounting according to International Financial Reporting Standard No. (13), and to demonstrate the role of accounting measurement and disclosure according to the principle of fair value on the quality of accounting disclosure, and thus influence the process of administrative decision-making according to international standards, with a focus on the International Financial Reporting Standard.

Research Importance

The importance of the research lies in the fact that it addresses an important topic of modern and contemporary topics. The concept of fair value is one of the concepts used to express the values ​​of different assets. The importance of this research also comes in identifying the Iraqi environment for the various economic units, in addition to explaining the role that accounting can play. 

Research Hypothesis

The research is based on the following hypotheses: The use of the profit multiplier model helps in measuring the fair value and improving the quality of accounting disclosure.

Research Sample

The research community is represented by the banks listed in the Iraq Stock Exchange. As for the research sample, it is represented by the Khaleeji Commercial Bank, and the research has been applied in this bank for the data of the financial years (2017-2021).

Theoretical Framework

The concept and Importance of Fair Value Accountin:

The fair value is the amount that will be agreed upon when selling an asset between a buyer and a seller, in the absence of abnormal circumstances such as liquidation, bankruptcy, or eventual circumstances, meaning that the fair value is the current value of the asset or liability in the market.

The fair value is seen as the amount for which an asset can be exchanged between a buyer and a seller, both of whom have the knowledge and desire to complete the transaction, so that both parties to the transaction have reasonable information about all relevant facts [1].

The fair value is the price that can be received when selling an asset or when settling an obligation in an organized process between market participants at the measurement date, where the fair value reflects the current prices, and thus it is the amount agreed upon between both the seller and the buyer, who have been informed mainly about the nature of And the characteristics of assets [2].

Thus, the fair value is the value of exchanging the asset in a real exchange process between willing parties to deal; Without this process being in cases of liquidation or forced sale, as defined by the International Accounting Standards Board as the amount in which the assets can be exchanged or the required payment can be made between parties willing to deal on a purely commercial basis [3].

After the definitions of fair value have been clarified, some points that are preferred to be taken into account when putting this definition into practice in preparing the financial statements of economic units can be summarized as follows [4].

• The fair value is the price determined under fair market conditions, and there is no need or intention to liquidate the assets or sell them quickly.

• The fair value is determined on a specific date, and at this moment there is certain information, special market conditions, and the existence of expectations that may change with the passage of time.

• The fair value will be the amount agreed upon between knowledgeable willing parties, and this means that both the seller and the buyer have been informed basically about the nature and characteristics of the assets, their condition, the market, and there is no asymmetry in the information.

The importance of fair value accounting has been determined by the fact that fair value accounting has an essential role to restore confidence and credibility of prices in the markets, especially in periods of financial crises. Therefore, fair value accounting must be used because of its role in increasing the credibility of accounting information. External users have confidence in the financial statements, which can negatively affect the decision-making process [5].

Justifications and Objectives for Applying the Fair Value

The principle of historical cost is one of the accounting principles that the accounting theory still adheres to in accounting measurement and is considered one of the most important principles on which the contemporary accounting model relies as a basis for evaluating assets and liabilities, and the distinguishing feature of historical cost is that the monetary value indicative of the exchange value of the process [6].

Despite those justifications on which the principle of historical cost is based, and its consistency with assumptions and accounting principles, it raised a lot of criticism about the limited usefulness of using the financial statements and reports resulting from it, especially the inadequacy of accounting information for decision-making, and by that he means cases of inflation as historical values They become unrealistic and therefore the financial statements do not represent the real financial position [7].

In line with the requirements of the modern business environment, the justifications for abandoning the historical cost principle are accompanied by justifications for applying the alternative, which is fair value accounting. Perhaps the most important of these justifications are the following [8].

• Accounting according to the historical cost principle is not suitable to be an appropriate basis for accounting measurement because it is no longer able to provide appropriate information for decision-making by users, especially external ones.

• The application of the historical cost leads to errors in the measurement of income due to the imposition of a constant monetary unit in light of the general rise in the price level.

• Following the principle of verification in its traditional sense according to the historical cost leads to errors in the timing of recognition (accounting recognition) of changes in value.

• The accounting measurement according to the historical cost principle is valid at the time of the event, as it relies on historical information in calculating costs and profits.

On the other hand, the fair value approach is the most attractive to professionals and standard-setters as it reflects the real economic situation of the company and is the most appropriate measure for decision-making, while the historical cost reference is based on data that is reliable at the beginning, but becomes less reliable with the passage of time and does not have the appropriate feature. To make decisions after the period of the occurrence of the event because it suffices to report the historical record of assets and liabilities without providing recent information about their present value, and the use of fair value in reporting all past and present operations by following an evaluation approach that improves the feature of comparability and stability when following the format, the cost Historical comparisons cannot be made with a high degree of accuracy and confidence [9].

Using the Profit Multiplier Model to Apply Fair Value Accounting and Improve the Quality of Accounting Disclosure

The profit multiplier ratio is one of the important indicators in the financial markets for the purpose of evaluating investment in ordinary shares, and the content of this ratio expresses the number of times that the investor receives the profit to justify the price set for the share, and the fair value of the share is calculated according to the following equation [10]

V = (M)(E) ÷ (1+K)ⁿ

Po          : The fair value of the share.

M            : The value of the share in the market to its earnings.

E             : Earnings per ordinary share.

K            : Required rate of return (discount rate).

As the value of the share in the market to its profitability (M) is calculated according to the following equation [11]:

M = P ÷ E

M :          The value of the share in the market to its earnings.

P :          The last closing price of the stock in the financial marke.

E :          Earnings per ordinary share

The earnings per ordinary share (E) is calculated according to the following equation: [11]

E = NI ÷ SU

E             : Earnings per ordinary share.

NI           : Net income during the year.

SU          : The number of common shares.

As for the required rate of return (discount rate) (K), it is calculated according to the following equation [12]

K = Rfr + B(Rs + Rfr)

K            : Required rate of return (discount rate).

Rfr         : The risk-free rate of return.

B             : Beta coefficient.

Rs           : Market rate of return per share.

The market rate of return per share (Rs) is measured according to the following equation: [13]

Rs = (p0 – p1 + Dij)  ÷  p1

Rs           : Market rate of return per share.

P0          : The closing price of the stock.

P1          : The opening price of the stock.

Dij          : Dividends per share.

The beta coefficient (B) is calculated according to the following equation: [13]

B = Cov(Rs Rm) ÷  Cov(Rs)

Cov(Rs Rm)        : The covariance between the market return per share and the investment portfolio.

Cov(Rs): The market return variance per share.

The value of a share in the market to its profitability reflects the expectations of investors and shareholders regarding the future profits of the economic unit, as the decrease or increase in the ratio depends on the expected growth rate of profits per share, so the investor pays more for the current dinar than the profits when he expects that the profits will increase substantially in the future when The share is sold at a low rate, but this relationship is not fixed, because the company itself may change its conditions [14].

After the researcher reviewed the models that the researchers dealt with in order to measure the fair value, it can be said that the profit multiplier model is the best model that can be applied in the Iraqi business environment for the following reasons:

• The ease of application of the model and the lack of required data in finding the fair value of the share, as well as the ease of understanding and analyzing the results that can be reached.

• The model takes into account the relationship between return and risk, and thus helps in determining the appropriate strategy to maximize returns and reduce risks.

• The model addresses the shortcomings of the previous models, as well as avoiding personal judgments and estimates, and thus reaching more accurate and objective results.

• This model can be used to evaluate investment in ordinary shares according to the fair value of these shares to justify the price set for them.

Applied Side of the Research

An Introductory Profile of the Research Sample Bank (Al-Khaleeji Commercial Bank): Khaleeji Commercial Bank was established as a private joint stock company under the incorporation certificate No. 7002 dated October 20, 1999 issued by the Companies Registration Department in accordance with the Companies Law No. 21 of 1997 as amended, with a capital of (600) million dinars paid in full. The bank started its business through The main branch on April 1, 2000, after obtaining a license to practice banking, and the business of the Commercial Bank of Iraq witnessed tremendous developments after opening a network of branches throughout the capital and its neighboring areas, and the Khaleeji Commercial Bank seeks to become a major bank in the field of banking services by providing services to all segments of society Iraqi, Its mission is to enhance the importance of shareholders through thoughtful financial management, consolidating the culture in managing risks and costs, and occupying a major position in financing development projects. And reconstruction of the country within the framework to achieve the goals of the bank in development and growth, and to expand the money market and the network of bank branches to cover all governorates of Iraq.
 

Using the Profit Multiplier Model Applying Fair Value Accounting and Improving the Quality of Accounting Disclosure in Khaleej Commercial Bank

In order to calculate the fair value of the shares of Khaleeji Commercial Bank, the data of Equation No. 1, represented by the value of the share in the market, must be determined to its earnings (M), earnings per ordinary share (E), and the required rate of return (discount rate) (K). The value of the share in the market can be explained to its profitability in the bank, the research sample for the period (2017-2021) through the Table 1.

It is noted from the above table that the value of the share in the market to its profitability was for Khaleeji Commercial Bank, which amounted to 1.772, 380.202, -10.682, -25906.8 and -8.931 dinars, respectively.

Table 1: The value of the share in the market to its profitability in Khaleej Commercial Bank for the period (2017-2021)

Source: prepared by the researcher based on the financial statements of the bank, the research sample

The earnings per share of the bank, the research sample, can be clarified for the period (2017-2021), as shown in the Table 2.

It is clear from the above table that the earnings per share for Khaleeji Commercial Bank were 10324.42, 118.358, -3.831, -0.004, -72.085 dinars, respectively, while the average was 2073.372 dinars.

Table 2: Earnings per share in Khaleej Commercial Bank for the period (2017-2021) 

Source: prepared by the researcher based on the financial statements of the bank, the research sample

It is possible to calculate the market rate of return per share for the research sample bank for the period (2017-2021) as shown in the Table 3.

Table 3: The average market return per share for Khaleeji Commercial Bank for the period (2017-2021)

Source: prepared by the researcher based on the financial statements of the bank, the research sample

It is clear from the above table that the average market return per share for Khaleej Commercial Bank was 143.269, 47.85, 0.421, 0.75, 22.893, respectively, while the average was 43.0366.

Table 4: Beta coefficient for Khaleeji Commercial Bank for the period (2017-2021)

Source: prepared by the researcher based on the financial statements of the bank, the research sample

As for the beta coefficient, it can be calculated for the research sample bank for the period (2017-2021) as shown in the Table 4.

It is noted from the above table that the beta coefficient  for  Khaleeji Commercial Bank was 0.955, -5.454, -3.161, -5.093, -2.87, respectively, either the median of the beta coefficient during the research years was -3.1246, and the required rate of return (discount rate) for the research sample bank for the period  (2017-2021)  can  be clarified through the Table 5.

Table 5: The required rate of return (discount rate) for Khaleej Commercial Bank for the period (2017-2021)

Source: prepared by the researcher based on the financial statements of the bank, the research sample

It is clear from the above table that the required rate of return (discount rate) for Khaleeji Commercial Bank was 136.9, -261.152, -1.417, -3.983, -65.778, respectively.

Thus, the fair value of the bank’s shares can be calculated for the research sample for the period (2017-2021) as shown in the Table 6.

Table 6: The fair value of Khaleej Commercial Bank shares for the period (2017-2021)

Source: prepared by the researcher based on the financial statements of the bank, the research sample.

It is noted from the above table that the fair value of Khaleeji Commercial Bank was (132.668), (-172.976), (-98.136), (-34.739), (-9.938) dinars, respectively, either the average fair value of the bank’s shares, the research sample for the period (2017-2021) was an amount of (-36.6242) dinars, and it becomes clear that the profit multiplier model is the best  model  that  can  be  applied  in the Iraqi business environment due to the ease of application of the model and the lack of data required to find the fair value of the share, as well as the ease of understanding and analyzing the results. Therefore, the measurement and disclosure of fair value can help improve the quality of financial reporting by providing appropriate and reliable information that can help meet the needs of users of accounting information. The importance of fair value accounting has been determined by the fact that fair value accounting has an essential role to restore confidence and credibility of prices in the markets, especially in periods of financial crises. Therefore, fair value accounting must be used because of its role in increasing the credibility of accounting information. External users have confidence in the financial statements, which can negatively affect the process of making various administrative decisions in the bank, the research sample.

During this research, a number of conclusions were reached, as follows:

• The fair value is the price determined under fair market conditions, and there is no need or intention to liquidate the assets or sell them quickly, and it is determined on a specific date, and at this moment certain information is available, and there are expectations that may change with the passage of time.

• Fair value accounting came to constitute a qualitative change that would make the financial statements more accurately reflect the financial position of the economic units, as well as enhance transparency through which the accounting presentation and disclosure requirements for financial information can be determined.

• The importance of fair value accounting comes from honest disclosure and showing an unbiased picture of the business result and the financial position of the economic unit, as well as achieving more credibility and relevance of accounting information. Thus, fair value accounting is more appropriate to the requirements of the modern business environment.

• The profit multiplier model is the best model that can be applied in the Iraqi business environment because of the ease of application of the model and the lack of data required to find the fair value of the share, in addition to the ease of understanding and analyzing the results that can be reached.

• Financial reporting by providing appropriate and reliable information that can help meet the needs of users of accounting information.

Recommendations

Based on the conclusions reached, the research recommends the following:

• The use of fair value in accounting measurement because of the ability of this measurement to show information about the real value and thus provides a valid basis for the users of that information to make their various administrative decisions.

• Establishing the concept of fair value, its characteristics and methods of measurement in the minds of those interested in the field of accounting and those working in the field of securities.

• The need for the administrations of economic units in general and banking units in particular to pay attention to the application of fair value accounting and to indicate the importance of this in accounting measurement and disclosure and in adjusting standards in line with the results reached.

• Benefiting from the expertise and professional efforts provided by the International Accounting Standards Board in issuing an Iraqi accounting standard aimed at determining the accounting measurement and disclosure requirements according to the fair value in a manner commensurate with the economic conditions in the local environment.

• Focusing on showing the accounting information of the real value of the economic unit, in a way that provides a valid basis for the users of that information to rely on in making their economic decisions, with the need to provide the practical application requirements for the use of this concept.

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