Abstract
M.Comm.
The application of measurement models in accountancy is the subject of debate, due to the financial crisis. In particular, it has brought renewed focus on the current use of the fair value measurement model in accounting standards, raising debates concerning whether the use of fair value worsened the effects of the financial crisis. Previously, there was a strong move towards fair value accounting especially in respect of financial instruments. As a result of the financial crisis, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), hereafter referred to as the Boards, responded to the criticism aimed at fair value accounting.
The objective of this research study is to establish whether the leading standard setters, namely the FASB and its predecessor the APB, and the IASB, and its predecessor the IASC, have established a conceptual paradigm for fair value accounting. The literature confirms that a paradigm is established when consensus has been reached regarding the related aspect. This study therefore assesses whether the Boards have reached consensus on all aspects of fair value accounting in financial reporting. The concepts found in the Frameworks and principles found in the financial reporting standards are assessed.
A qualitative research design in a critical framework is adopted for this research. The research is a critical assessment of the work of the Boards to determine whether a conceptual paradigm for fair value accounting has been established. This critical assessment is structured into various chapters that are dedicated to a specific decade. Each chapter examines the role that the Boards played in the development of the conceptual paradigm of fair value accounting for each decade.
This study found that the Boards made significant progress on the development of the fair value paradigm over the period of this study. The most significant progress on the fair value paradigm was made at a financial reporting standards level. The Boards reached consensus on the fair value definition and exit price concept. Consensus was also reached on the initial measurement of fair value and on the measurement guidance for fair value. This measurement guidance was consistent and can be applied in all financial reporting standards that require fair value. The
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subsequent measurement principles established in IFRS 9 required an assessment of the business model and contractual cash flows, to determine whether fair value should be applied or not. It remains to be seen whether this principle will be accepted by the FASB and furthermore, whether this principle can be applied to other financial reporting standards that refer to fair value. The Boards reached consensus on the disclosure of fair value measurements with the publication of the standards on fair value measurement, SFAS No. 157 Fair Value Measurements and IFRS 13 Fair Value Measurements.
However, limited progress was made on the development of the fair value paradigm at a conceptual Framework level. The Boards have not developed a clear measurement objective or provided conceptual guidance for the fair value paradigm. They have recognised the conceptual shortcomings of the measurement guidance provided in the Framework, and it is hoped that they will address these shortcomings of the fair value paradigm in the measurement phase of the conceptual Framework project.Key words: fair value accounting, financial reporting, Framework, paradigm, standard setters