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Fair Value Accounting

Implications for Users of Financial Statements


Kristian Bachert

Fair value accounting is viewed as a major feature of IFRS and several standards either require assets to be measured at fair value or at least provide an option to fair value measurement instead of applying historical cost. While it is argued that fair values provide more timely and relevant information, the global financial crisis led to a considerable debate about the usefulness of fair value accounting. The study examines the implications of fair value accounting for financial analysts and nonprofessional investors. It provides evidence that, even if financial analysts find it challenging to produce accurate forecasts under a fair value regime, nonprofessional investors make larger investments and are more confident with their judgments for fair value firms.


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Fair values are a major feature of financial accounting under IFRS. Unlike many local GAAP standards, IFRS allows preparers of financial statements to measure assets and lia- bilities at their market values instead of historical cost. The IASB and many accounting practitioners and academics believe that fair values provide users of financial statements with more timely and more relevant information for making investment decisions. The financial crisis in 2008, however, led to a controversial debate about the usefulness of fair value accounting. It was argued that fair values significantly contributed to the crisis. Ac- cording to this view, troubled banks sold their assets at fire prices which became relevant also for other banks. The fair value concept was thus blamed of having caused contagion in the financial industry. Additionally, it was postulated that fair values provide no rele- vant information when these measures are determined “mark-to-model” or when assets are held for a long period of time or until maturity. Many European and U.S. financial institutions were bailed out or completely national- ized. Nevertheless, fair value accounting is still of great relevance. Today, the European Union is exposed to a significant currency and debt crisis. Some member states face low growth prospects and large financial deficits, resulting in sharp declines of their bond val- ues. These decreases were treated differently by the bondholders, such as banks or finan- cial institutions. Whereas some expected the decreases not to be permanent, others used the lower market values as the new carrying values....

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