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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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2 Conceptual grounding


2.1 Fair value accounting This section presents the fair value approach under IFRS and gives an overview of the re- cent developments which finally resulted in the fair value standard IFRS 13. It reviews the regulations included in the standard and presents the three-step process of fair value de- termination. The specific regulations for the fair value accounting of investment proper- ties (IAS 40) and PPE (IAS 16) are also presented. 2.1.1 Recent developments of fair value accounting under IFRS The introduction of IFRS is viewed as a large step to bring about international conver- gence (Peng/Bewley (2010), p. 983). In the European Union, the release of Regulation (EC) 1606/2002 required all publicly traded firms to prepare their consolidated financial statements in accordance with IFRS from 2005 onwards (Aharony et al. (2010), p. 536). This change induced a big push as it increased the number of enterprises applying the new standards from several hundred to several thousand and ensured the application of IFRS by companies that varied considerably in different aspects such as size, ownership struc- ture, capital structure, political jurisdiction, and financial reporting sophistication (Schip- per (2005), p. 102). In addition, this decision did not only constitute a large step for the current member states of the EU but also for future member states and for the standard setter as well (Larson/Street (2004), p. 90). Even though the introduction of the new accounting system brought many changes for preparers, auditors and users of financial statements, the feature of the...

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