Abstract
This chapter analyses issues arising from the project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards. It discusses, in particular, the possible use of fair value as the preferred measurement basis. Two competing world views are identified: a Fair Value View, implicit in the IASB’s public pronouncements, and an Alternative View implicit in publicly expressed criticisms of the IASB’s pronouncements. The Fair Value View assumes that markets are perfect and complete and that financial reports should meet the needs of investors and creditors by reporting fair values derived from current market prices. The Alternative View assumes that markets are imperfect and incomplete and that, in such a market setting, financial reports should also meet the monitoring requirements of current shareholders by reporting transactions and events using measurements that reflect the opportunities available to the reporting entity. The different implications of the two views are illustrated by reference to specific issues in recent accounting standards.
This chapter includes a reprinted article first published under the title “Fair Value and the IASB/FASB conceptual Framework Project: An Alternative View” in Abacus in 2008, which is followed by the author’s comments by way of a postscript on further developments on the IASB conceptual framework project. It is based on the original paper presented at the Fourth International Workshop on Accounting and Regulation in 2007. The author is grateful for comments on an earlier draft by Richard Barker, Michael Bradbury, Graeme Dean, Andrew Lennard, Stuart McLeay, Geoff Meeks, Steve Zeff and participants in the Fourth International Workshop on Accounting and Regulation, Siena, September 2007, and the ASB Academic Forum, but is solely responsible for any remaining errors or omissions.
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Notes
- 1.
The paper discusses specifically measurement on initial recognition, but the discussion has wider application.
- 2.
An Alternative View is a note explaining the view of a Board member who did not vote in favour of issuing a particular exposure draft or standard (in the latter case, it is described as a ‘dissenting view’). The alternative view developed in this chapter is consistent with a number of such views but also draws on the views of external critics of the IASB: it, therefore, has no claim to be an expression of the views of particular members of the IASB, and it is a ‘world view’ rather than a comment on a particular draft or standard.
- 3.
- 4.
Bullen and Crook (2005) provide a staff overview of the objectives.
- 5.
The first two chapters of the Discussion Paper (including the Basis for Conclusions), covering objectives and qualitative characteristics, are more than twice as long as the entire existing IASB Framework.
- 6.
Some examples of this balancing process in standards are given later under the heading Reliability and Prudence.
- 7.
This point is elaborated in the ASB’s response to the Discussion Paper, which is available on the ASB’s website (http://www.frc.org.uk/asb/press/pub1343.html, accessed, 8 March 2008).
- 8.
Walton (2006), a close observer of IASB meetings, notes the possible implications of this change for the future extension of fair value measurement.
- 9.
Paton and Littleton (1940, pp. 19–20).
- 10.
Bromwich (2004) suggests that impairment tests should not be one-sided.
- 11.
For a further discussion of comprehensive income in this journal, see Cauwenberge and De Beedle (2007, pp. 1–26).
- 12.
- 13.
This is not to say that specific measures cannot be associated with a particular objective. An obvious example is Chambers (1966), who justified the need for exit value measures in terms of an objective of measuring financial adaptability. However, it is notable that Chambers’ ‘current cash equivalent’ measure was not the same as fair value: notably, he came to the view that non-vendible durable assets should be measured at zero value (because there was no cash equivalent available) rather than a hypothetical exit value (Chambers 1970). If there exists a fungible arm’s length price for a comparable asset he would use it to report the item. Chambers also advocated valuing bonds at face values rather than current market prices. For a summary see Chambers (1974).
- 14.
A similar (but not identical) identification of two schools of thought is made at the end of Andrew Lennard’s very interesting and insightful paper on ‘Liabilities and How to Account for Them’ (2002).
- 15.
Staff opinions are not expressed in public, but staff recommendations are expressed to the boards, although only on issues that are referred to them. However, staff do author published papers and their views are sometimes expressed quite forcefully there (e.g., Johnson 2005).
- 16.
Directly’ means that the measure summarizes expected future cash flows, as in a discounted present value.
- 17.
Barth (2006), an IASB Board member, provides a useful discussion of the orientation of accounting information towards the future, making clear the distinction between recognition (only present rights and obligations should be recognized) and measurement (expected cash flows from those rights and obligations may affect their measurement). She views measurement from a fair value perspective. Bromwich (2004) provides a discussion of future-oriented information from an alternative, deprival value perspective. See also Rosenfield’s discussion in this journal of the way to report ‘prospects’ data within a fair value reporting system (2008, pp. 48–60).
- 18.
A feature of standard-setting has been the constructive engagement of the academic and business communities. Standard-setting bodies have always been well stocked with experienced practitioners, but there have also been notable academic inputs. For example, David Solomons was a member of the Wheat Committee that devised the FASB and Robert Sprouse was one of FASB’s first members. Robert Sterling and Paul Rosenfield were also early members on the FASB. In the UK, both the Chairman (David Tweedie) and Vice-Chairman (Brian Carsberg) of the ASB, at its inception, started their careers as full-time academics.
- 19.
This type of criticism has a long history—see the discussion of the 1930s ideas of George Husband described in this journal (Reinstein et al. 2008, pp. 82–108).
- 20.
The Penman paper uses historical cost earnings for illustrative purposes. This does not preclude current replacement cost, if it were available, from providing an even more useful measure. This is compatible with the Alternative View expressed in this paper. That view does not deny the potential usefulness of current values (entry or exit) when they can be reliably measured and are relevant to the circumstances of the entity.
- 21.
Chambers’ reservations have been noted earlier (note 13). Sterling was extremely careful to point out that his ‘conclusions are restricted to trading assets in a trading firm’ (Sterling 1970, p. 36) and he acknowledged the difficulties caused by market imperfections. Moreover, unlike the advocates of fair value, he advocated the deduction of transaction costs from exit prices in order to establish exit values (p. 327). For a summary of Sterling’s later ideas, see Lee and Wolnizer (1997).
- 22.
A recent paper by Hitz (2007) evaluates the decision usefulness of fair value accounting both from the measurement perspective and from the informational perspective that Beaver and Demski identify as being the appropriate role for financial reporting in a realistic setting of imperfect and incomplete markets. The conclusion of this evaluation is that the case for fair value measurement is supported only when reliable market values are available.
- 23.
- 24.
The history of the concept and its role in the inflation accounting debate is surveyed in Tweedie and Whittington (1984). Recent examples of work relating deprival value to fair value are Bromwich (2004) and Van Zijl and Whittington (2006). A good example of economic analysis supporting the use of deprival value is Edwards et al. (1987).
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Whittington, G. (2014). Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View. In: Di Pietra, R., McLeay, S., Ronen, J. (eds) Accounting and Regulation. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8097-6_10
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