[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/alu/journl/v2y2011i13p19.html
   My bibliography  Save this article

Auditing Fair Values In A Sensitive Socio-Economical Context

Author

Listed:
  • Nicoleta Farcane
  • Delia Deliu
  • Maria Gheorghian
Abstract
The concept of fair value was subject of many debates and disputes in recent years. These debates have focused mainly on the relevance of the concept, but also on the practical difficulties in determining reasonable estimates, raising particularly the interest of practitioners in terms of identifying the best valuation procedures and techniques, respectively auditing fair values. Determining the fair value involves a broad spectrum of approaches, from the simplest to the most complex and burdensome ones. In the current socio-economical context, market and stock volatility raises questions about fair values, even if there are conditions for the existence of market information. The problem gets more complicated where fair value is determined based on cash-flows, especially where there are uncertainties about the value and timing of cash-flows and adjustment rates, and the impact of used assumptions related to future conditions, transactions and events. Last but not least, assessment of fair value is based on the going concern assumption, which may not be applicable in the context of an economic crisis. The International Financial Reporting Standards (IFRS) provide for financial instruments to be measured generally at fair value. Because fair value is primarily assimilated with market price, its assessment requires the existence of a market able to operate under normal conditions, or in other words, sufficiently liquid to assess the price of financial instruments. And, one of the features of the current crisis consists in the significant decrease of liquidities on the market, which in turn caused a high impairment of derivatives (those based on American real estate). As American real estate can never be zero, market prices are not the real ones. However, this situation highlights the volume of liquidities available to buyers, which is a feature of imperfect markets. But the International Financial Reporting Standards did not anticipate the effects of liquidities on financial instruments, as their development is based on perfect functioning of financial markets. Under these circumstances, fair value measurement started to be increasingly criticised, and the International Accounting Standards Board (IASB) has changed the rules for measurement of financial instruments at fair value. Given the high degree of volatility, auditors should ensure that valuation methods and assumptions used by management under normal conditions for determining fair values are appropriate in a sensitive socio-economical context as well, and that the valuation model includes also the effects of subsequent events.

Suggested Citation

  • Nicoleta Farcane & Delia Deliu & Maria Gheorghian, 2011. "Auditing Fair Values In A Sensitive Socio-Economical Context," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-19.
    • Handle: RePEc:alu:journl:v:2:y:2011:i:13:p:19
    as

    Download full text from publisher

    File URL: http://oeconomica.uab.ro/upload/lucrari/1320112/19.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cornett, Marcia Millon & Rezaee, Zabihollah & Tehranian, Hassan, 1996. "An investigation of capital market reactions to pronouncements on fair value accounting," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 119-154, October.
    2. Joerg-Markus Hitz, 2007. "The Decision Usefulness of Fair Value Accounting - A Theoretical Perspective," European Accounting Review, Taylor & Francis Journals, vol. 16(2), pages 323-362.
    3. Bhargava, Rahul & Dubofsky, David A., 2001. "A note on fair value pricing of mutual funds," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 339-354, February.
    4. Nicolas Véron, 2008. "Fair value accounting is the wrong scapegoat for this crisis," Policy Contributions 19, Bruegel.
    5. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    6. Wayne Landsman, 2007. "Is fair value accounting information relevant and reliable? Evidence from capital market research," Accounting and Business Research, Taylor & Francis Journals, vol. 37(S1), pages 19-30.
    7. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    8. Michel Magnan, 2009. "Fair Value Accounting and the Financial Crisis: Messenger or Contributor?," CIRANO Working Papers 2009s-27, CIRANO.
    9. Wayne Landsman, 2006. "Fair value accounting for financial instruments: some implications for bank regulation," BIS Working Papers 209, Bank for International Settlements.
    10. Ramanna, Karthik, 2008. "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 253-281, August.
    11. Hann, Rebecca N. & Heflin, Frank & Subramanayam, K.R., 2007. "Fair-value pension accounting," Journal of Accounting and Economics, Elsevier, vol. 44(3), pages 328-358, December.
    12. Beatty, Anne & Chamberlain, Sandra & Magliolo, Joseph, 1996. "An empirical analysis of the economic implications of fair value accounting for investment securities," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 43-77, October.
    13. Barth, Mary E. & Landsman, Wayne R. & Wahlen, James M., 1995. "Fair value accounting: Effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 577-605, June.
    14. Skinner, Douglas J., 2008. "Discussion of "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting"," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 282-288, August.
    15. Michel L. Magnan, 2009. "Fair Value Accounting and the Financial Crisis: Messenger or Contributor?," Accounting Perspectives, John Wiley & Sons, vol. 8(3), pages 189-213, August.
    16. Michel Magnan & Daniel Thornton, 2009. "Fair Value Accounting," CIRANO Working Papers 2009s-47, CIRANO.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Procházka, 2011. "The Role of Fair Value Measurement in the Recent Financial Crunch," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(1), pages 71-88.
    2. Tamás Szücs & József Ulbert, 2017. "Role and Measurement of Fair Valuation in the Hungarian Credit Institution Sector," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(3), pages 51-73.
    3. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.
    4. Giuseppe Sannino & Gianluca Ginesti & Carlo Drago, 2014. "Impairment estimates for available-for-sale equity instruments under IFRS: evidence from italian Banks," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 115-140.
    5. Fawzi A. Al Sawalqa, 2016. "Fair Value Accounting: A Controversial but Promising System," Accounting and Finance Research, Sciedu Press, vol. 5(1), pages 1-88, February.
    6. Justin Chircop & Zoltán Novotny-Farkas, 2014. "The economic consequences of including fair value adjustments to shareholders’ equity in regulatory capital calculations," CERS-IE WORKING PAPERS 1426, Institute of Economics, Centre for Economic and Regional Studies.
    7. Bengtsson, Elias, 2011. "Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 22(6), pages 567-580.
    8. Mehnaz, Laura & Rahman, Asheq & Kabir, Humayun, 2023. "Covenant violation concern and investors’ pricing of Level 3 fair value adjustments," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    9. Lambert Jerman, 2015. "Les Enjeux De L'Application Des Normes Ias-Ifrs : L'Etude Des Preparateurs Des Comptes, Une Perspective De Recherche Encore Inexploree," Post-Print hal-01188736, HAL.
    10. Daniel Mügge & Bart Stellinga, 2015. "The unstable core of global finance: Contingent valuation and governance of international accounting standards," Regulation & Governance, John Wiley & Sons, vol. 9(1), pages 47-62, March.
    11. Michel Magnan & Haiping Wang & Yaqi Shi(Sans nom), 2016. "Fair Value Accounting and the Cost of Debt," CIRANO Working Papers 2016s-32, CIRANO.
    12. Cătălina Gorgan & Vasile Gorgan & Valentin Florentin Dumitru & Ileana Cosmina Pitulice, 2012. "The Evolution of the Accounting Practices During the Recent Economic Crisis: Empirical Survey Regarding the Earnings Management," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 14(32), pages 550-562, June.
    13. Ozili, Peterson K, 2021. "Accounting and financial reporting during a pandemic," MPRA Paper 105183, University Library of Munich, Germany.
    14. Mary Barth & Wayne Landsman, 2010. "How did Financial Reporting Contribute to the Financial Crisis?," European Accounting Review, Taylor & Francis Journals, vol. 19(3), pages 399-423.
    15. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.
    16. Phillip de Jager, 2014. "Liberal Fair Value Accounting in Banks: A South African Case Study," Australian Accounting Review, CPA Australia, vol. 24(2), pages 134-153, June.
    17. Gregory Heem & Dominique Dufour, 2012. "Crise financière et comptabilité : le cas du reclassement des instruments financiers dans les banques européennes," Post-Print halshs-00721108, HAL.
    18. Hui Zhou, 2023. "Hedging Performance and Fair-Value Financial Reporting: Evidence from Bank Holding Companies," JRFM, MDPI, vol. 16(2), pages 1-16, January.
    19. Michel Magnan & Garen Markarian, 2011. "Accounting, Governance and the Crisis: Is Risk the Missing Link?," European Accounting Review, Taylor & Francis Journals, vol. 20(2), pages 215-231.
    20. Lin Liao & Helen Kang & Richard D. Morris, 2021. "The value relevance of fair value and historical cost measurements during the financial crisis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2069-2107, April.

    More about this item

    Keywords

    fair value; historical costs; fair value audit; volatility; economic crisis;
    All these keywords.

    JEL classification:

    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:alu:journl:v:2:y:2011:i:13:p:19. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dan-Constantin Danuletiu (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.