| Q | The IASB wants fair value accounting doesn't it? |
| A | Whilst IASB's exposure draft on amendments to its standard on business combinations was based on a fair value perspective, IASB has not stated that its view is that fair value should be the preferred basis for accounting in general. The truth is that different IASB members probably take different views: some would probably agree that, in any given situation, fair value is the most promising accounting treatment to be considered. But there is no formal proposal that financial reporting should-either in theory or at the standards level-move to a comprehensive fair value system. |
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| Q | But they have just published a paper on Measurement Bases for Financial Accounting which is all for fair value? |
| A | Well, yes-but the paper is merely a Discussion Paper, intended to contribute to the debate on measurement, and to seek views. It has been written by staff of the Canadian Accounting Standards Board (AcSB) and does not reflect the official views of either IASB or AcSB. The paper is also far from a comprehensive fair value proposal - it deals only with the question of how assets and liabilities should be measured on initial recognitionso it does not say anything about whether those measures should subsequently be adjusted to reflect changes in prices. The responses to the Canadian paper will feed into the IASB/FASB work on the Conceptual Framework. |
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| Q | But that's not all, is it? |
| A | Well, the FASB are expected to publish soon a standard on 'Fair Value Measurements' - and IASB intends to publish a similar text as an Exposure Draft. It too, is not a proposal for the comprehensive use of fair values in accounting: its aim is merely to describe how fair value should be determined in the cases where it is used: the question of when fair value should be used is to be left to other standards. IASB is to consider all references to fair value in IFRS and decide in which cases the FASB-based proposals will be appropriate. |
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| Q | So that's all right then? |
| A | Maybe. The FASB standard will make clear that fair value is to be considered from an exit perspective - that is, that the amount at which an asset is to be stated will reflect what in theory might be raised by the most advantageous sale. That is rather different from the way in which revaluation has been carried out in the UK in the past. Whether that is 'all right' will depend on what you think about exit value accounting; how widespread its use is to be; and whether IASB will be willing to rethink the basis of measurement as part of its project on the Conceptual Framework. |
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| Q | But is does mean that the acquisition of any asset that is to be carried at fair value will result in a reported loss? |
| A | Yes- at least it would appear that that will often be the case. |
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| Q | I can understand fair value accounting where assets are traded on markets and reliable prices are readily available. What about other assets? |
| A | Both the Canadian and the FASB documents suggest that it would be possible to use estimates of fair value where market values are not available. But it would seem that many assets will continue to be stated at historical cost. |
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| Q | You don't sound wholly enthused? |
| A | We commented on an exposure draft of the FASB standard and have contributed to the Canadian work. Apart from the FASB's general use of exit values, we also wonder whether it is right to base a theory of measurement simply on the premise of complete and perfect markets. Both documents acknowledge that this may not always be the case - but suggest that in any event fair value should be estimated with the objective of determining what the price would be on such a market, if one existed. If this is seen to be unworkable in many cases, it might have the paradoxical effect of retaining the use of historical cost where sound alternatives could give better financial reporting. |
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| Q | What alternatives are there? |
| A | Well, current replacement cost, for example, may be more conceptually sound and practical, in some circumstances. |
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| Q | Doesn't fair value accounting imply less reliability and more volatility in financial statements? |
| A | Let's take these separately. In a sense, historical cost accounting is reliable - there is often little doubt about what the historical cost of an asset is - but it does not necessarily give a depiction of the asset that is any sense relevant. Of course, as they reflect price changes, fair value measures will be more volatile than historical cost measures. But perhaps the main consideration is whether that volatility reflects economic reality, and whether changes in the measurement of assets are reported in a way that clearly distinguishes them from changes in assets resulting from transactions. |
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| Q | What is the ASB doing about it? |
| A | As noted above, we have contributed and shall continue to contribute to all this work. We shall be hosting round tables in the New Year and shall publish a paper before then discussing many of the issues that arise. |
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| Q | How do I stay in touch? |
| A | Register at the ASB website: you will be promptly informed of ASB developments. |
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