The Pros and Cons of Fair Value Accounting in a Globalized Economy

Abstract

Fair Value Accounting is not a new concept, either in business decisions or in financial reporting. Nonetheless, due to big changes that took place over the last 20 to 30 years in the worldwide economy and the influence of the 2007 financial crisis, it has reemerged as one of the “hottest topics” on the agenda of Accounting Standards setters both under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standard (IFRS). Current research seems well balanced across the pros and cons of fair value, lending ammunition both to those “in favor” and to the “opponents” of fair value accounting. Subjectivity, estimates, and managerial discretion permeate the concept, definition, and measurements of fair value, leaving such measurements open to an aggressive use of judgment and estimates. However, fair value accounting is more closely related to the needs of a globalized and information-based economy and is likely to grow in importance and use in the future. This article discusses evidence and summarizes some current papers on the informational impact of fair value measurements on market participants.

Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?

“…The greater use of fair value measurement has proven controversial among regulators, accounting researchers, practitioners and various market participants (Christensen and Nikolaev, 2013; Laux and Leuz, 2009). Enthusiastic supporters of fair value accounting (FVA) argue that fair value bypasses the inconsistencies of historical cost accounting by providing relevant information in a timely manner, and thus increases transparency and supports better decision-making (Barth, 2006; Barth et al, 2001; Bleck and Liu, 2007; Hitz, 2007; Malone et al, 2016; Marra, 2016; Zyla, 2012). However, opponents of FVA claim that fair value is costly and difficult to implement.…”

“…It also summarises the current assessment of the time value of money and risk. In this way, fair value provides users with relevant and reliable information that is useful for decision-making (Barth, 2006; Gigler et al, 2007; Marra, 2016; Zyla, 2012). The view that FVA provides relevant information has been understood in the banking sector for many years, as shown in Barth (1994) and Barth et al (1996) and affirmed recently by Givoly et al (2016).…”

“…In the absence of active markets, fair value can be more subject to manipulation, which clearly reduces the relevance of financial information (Ronen, 2008; Watts, 2003). The second reason is that fair value reflects changes in asset values that are expected to be realised in subsequent operations (Marra, 2016). The ability to reflect such changes is affected by a number of factors that are relevant for non-financial assets but not financial assets, notably the length of the production cycle and whether the assets might change physically over time.…”

Fair Value in Finance: Fifty Shades of Fairness

“…Ускорившиеся в 1980-е годы инновации в технологиях, экономике и обществе, информационная революция, глобализация привели к росту значимости для компаний и рынков нематериальных аспектов деятельности, вообще не имеющих исторической оценки или имеющих такую оценку, что она не отражала их реальной роли в создании финансового результата. Многие авторы (см., например, (Zyla, 2012;Marra, 2016)) считают эти макроэкономические процессы основными детерминантами изменений в информационном обеспечении финансовой сферы.…”

The impact of managerial discretion on fair value information in the Australian agricultural sector

“…The use of FVA has increased progressively over the past two decades (Mala and Chand, 2012; Yao et al , 2018). Proponents argue that FVA reflects current market conditions and fulfils the need for more decision‐useful financial information given the increasing complexity of a globalised economy (Barth, 2006; Hitz, 2007; Malone et al , 2016; Marra, 2016). Opponents claim that subjectivity and assumptions permeate the concept and measurements of fair value, leaving such measurements open to an aggressive use of managerial discretion which may ultimately affect an entity’s reported earnings (Ball, 2006; Song et al , 2010; Ramanna and Watts, 2012).…”