Current issues in fair value accounting approach

The issue of fair value in financial reporting was a matter of great discussion and some controversy in the recent financial crisis (KPMG, 2011). As Georgiou and Jack (2011) emphasize, the complexity of measurement is often raised by practitioners as a key problem with fair value accounting, while the concept of fair value also being questioned in terms of its theoretical rationality (based on financial economics, econometric quantitative rationality and functional utility mainly attacked for its role in financial crises). In the context of the recent credit crunch, fair value accounting and fair value measurements raised a series of criticisms (especially on behalf of financial institutions). Despite fair value recently having to face the trial as one of the financial crisis’ scapegoats (Veron, 2008), the main question we must stick trying to find a pertinent answer for relates to whether fair value accounting provides more useful information to investors than alternative accounting approaches (Ryan, 2008). In this regard we find studies documenting a positive answer that is strongly dependent on the quality of fair value estimates, further documenting the importance of fair value measurement.

This paper contributes to the debate on fair value measurements by clarifying the current state of accounting regulations in the international arena. Concluding upon the developed analysis, we might state that the two Boards have reached significant convergence in the area of fair value measurement through the newly issued IFRS 13 being largely consistent with SFAS 157, main remaining differences being previously synthesized. Still, we must not forget that IFRS 13 and SFAS 157 only offer guidance on how to measure fair value. Therefore, fair value differences should also be considered in the light of the other IASB and FASB standards addressing the use of fair values. Fair value measurement nowadays applies to different assets, liabilities and equity instruments under IFRS and US GAAP. IAS 39 and IFRS 9 continue to be more restrictive in recognizing the difference between the transaction price and the fair value at initial recognition as a gain or loss, requiring that fair value measurement only used data from observable markets. Another significant difference comes from net presentation (netting or offsetting) of derivatives, which is, currently, generally not allowed by IAS 32.

* This paper is one of the research outputs of projects P403/11/0002 registered at Czech Science Foundation (GAČR) and POSDRU/89/1.5/S/59184 Babeş-Bolyai University, Cluj-Napoca being a partner within the project.