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Financial Reporting under IAS/IFRS

Theoretical Background and Capital Market Evidence – A European Perspective

Vera Palea

This book provides the theoretical background and analyses capital market research related to the IAS/IFRS adoption in Europe, which is one of the most important and controversial events in the history of accounting. It adopts both an investor and a firm perspective and therefore investigates the effects of adopting IAS/IFRS on the decision-usefulness of financial reporting for investors as well as on the firms’ cost of capital. The book also focuses on fair value accounting, which is widely controversial.
All these issues are of considerable interest for standard setters and policy makers, whose primary aims are in fact to provide investors with useful information for their decision-making process and to allow firms to have access to a more efficient and cost-effective capital market.

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Chapter 5: Fair Value Accounting and Financial Reporting Quality 125

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125 Chapter 5 Fair Value Accounting and Financial Reporting Quality 1. Introduction Standard setters and extensive academic literature believe that fair value ac- counting provides the most relevant information for financial statement users (e. g. Barth, Beaver and Landsman, 2001). Fair value accounting should ensure a higher degree of transparency of financial statements, which should lead to a higher value-relevance of accounting data and a better capability of financial markets to reflect the actual value of a firm. An extensive use of fair value accounting should increase the quantity of private information brought into public domain, thus leading to a more efficient resource allo- cation and capital formation. Both the FASB and IASB have issued several standards that mandate disclosure or recognition of accounting amounts using fair values. Among the most significant are those standards that explicitly relate to financial instruments. Under both US GAAP and IAS/IFRS, fair values are in fact most frequently used for financial assets and liabilities. The recent financial crisis has turned the spotlight on fair value ac- counting and has led to a major policy debate involving among others the US Congress and the European Commission as well as banking and accounting regulators around the world. Critics argue that fair value ac- counting has significantly contributed to the financial crisis and exacer- bated its severity for financial institutions all around the world. Oppo- nents claim that fair value is not relevant and it is potentially misleading for assets that are held for a long period...

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