Abstract
M.Comm.
The debate around the usefulness of fair value as a basis for measuring financial
instruments has become increasingly topical and, in recent times, has attracted the
attention of various market participants as a result of the global credit crisis which
developed during 2007. The qualitative characteristics of relevance and reliability are
central to any analysis regarding the usefulness of fair value as a financial instrument
measurement basis. This study therefore investigates the relevance and reliability of the
fair value measurements disclosed by the four largest South African banks in their 2008
annual financial statements in order to determine whether fair value is the most useful
basis for measuring the majority of the financial instruments of South African banks. The
financial instrument categories and fair value hierarchy defined in International Financial
Reporting Standards (IFRS) are used to perform a content analysis on the 2008 annual
financial statements of the banks included in the study, in order to conclude on the
relevance and reliability, respectively, of the financial instrument fair values provided.
Collectively, an analysis of the financial instrument categories applied and an
investigation of the differences between the fair values and carrying values of financial
instruments not measured at fair value suggest that fair value is not the most relevant
basis for measuring the majority of the financial assets of all of the banks included in the
study, and is also not the most relevant basis for measuring the majority of the financial
liabilities of three of the four banks included in the study. Based on their fair value
hierarchy classification, the fair values of the majority of both the financial assets and
financial liabilities of the banks included in the study were not found to be reliable. Fair
value was therefore not found to be the most useful basis for measuring the majority of
the financial instruments of three of the four banks surveyed, while the findings for the
fourth bank were inconclusive in this respect.
Keywords: Fair value, financial instruments, usefulness, relevance, reliability