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Critique of Fair Value Measurement
Fair value measurement resulted after the IASB and FASB introduced fair value paradigm. Its decision usefulness paradigm was adopted after FASB was formed. What makes fair value unique is its allowing of investors and regulators to access vital financial information of entities which enables them to judge the institution’s stability and viability. Since its implementation, fair value is faced with controversies on how gains and losses are treated on revaluation. However, what matters is whether the decision useful information of fair value is represented. Fair value measurement has been blamed for having a negative influence in financial reporting. This current hypothetical value is market-based and non-observable. Its effectiveness has been questioned especially after the 2007-2009 recession. Most of the critics argue that its use in financial reporting worsened the recession and enhanced adverse effects on the companies that were affected. Most criticism of fair value emanates from the banking sector. In 2008, the president of the American Bankers Association (2008) categorically stated that fair value accounting was the main factor causing problems in the financial markets. However, the strongest opposition was from Wallison (2008) who argued that fair value is the major cause of drop in the value of assets, and has resulted in instability in financial institutions apart from being the cause of the U.S. recession. (Khan, 2010 in David, 2011) Wallison (2009, pp. 2-3, in David, 2011) has argued that fair value should either be improved on or abandoned due to its ineffectiveness. He says that with fair value, financial statements are based on earning power of companies rather than their stability. This view is shared by Bloomfield et al. (2006) and King (O’ Grady, 2008). Linsmeier (2011) however links lack of transparency in financial stability to be one of the reasons for the collapse of the US thrift industry and the financial crisis of the US Savings & Loans in the late 1980s. When losses go unrecognized, or take long before being noticed, the bank’s future is put at stake as they unknowingly continue to take more risks in their financial transactions. Cuzman, Dima & Dirma (2010) argue that fair value measurement has improved financial reporting; and so we can overlook its limits since it allows financial information to be accessible to investors, which can help them predict the viability of a financial institution. This means that losers and winners and easily be distinguished. The current financial crisis in the US compares to that of Japan. They shared similar financial environments and past systems they used in financial reporting which did not embrace transparency. Hassan (2011) notes that fair value paradigm has not received the kind of reception it deserves. However, Anagnostopolous & Buckland (2011) observe that fair value has resulted in positive changes in financial reporting today. In conclusion, the fair value remains the best alternative today in financial reporting. It helps distinguish between healthy companies and the unhealthy ones. Although it has faced lots of criticisms and opposition, the critics never came up a functional alternative to it. Therefore, bodies responsible for standard-setting in accounting must make this fully available to investors and regulators. This will go a long way in helping combat future crises in the financial world.
Anagnostopoulos, Y. & Buckland, R. “IAS 39 and Measurement Quality: Bankers’ Perceptions.” Journal of Applied Accounting Research (2011): Vol. 12, 2, 157-178.
Cuzman, R. Dima, B and Dirna, S. “IFRS 9 for Financial Instruments, Quality of Information and Capital Markets Volatility.”An Empirical Assessment for Eurozone (2010): Vol. 9, 2, 284-304.
David Prochazka. “The Role of Fair Value Measurement in the Recent Financial Crunch: Prague economic papers; (2011) pp 71-88
Hassan, A. “Understanding the differences between FRS 139 and IFRS 9.” Accountants Today, (2011) pp. 26, 28.
Joerg-Markus Hitz. “The Decision Usefulness of Fair View Accounting – A Theoretical Approach” July 2005, Cologne working papers on Banking, Corperate Finance, Accounting and Taxation. url:http://www.wiso.unikoeln.de/workingpapers/bcfat/http://writemyassignments.org/order
Linsmeier, T. “Financial Reporting and Financial Crises: The Case for Measuring Financial Instruments at Fair Value in the Financial Statements.” Accounting Horizons; (2011) Vol 25, 2,409-417,
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