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Fair Value: Your Value or Mine? An Observation on the Ambiguity of the Fair Value Notion Illustrated by the Credit Crunch

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  • Martin Schmidt

Abstract

Current International Financial Reporting Standards (IFRSs) define fair value as a transaction price. In imperfect markets, buyer's and seller's marginal prices, at which they are rationally willing to transact, differ. The transaction price can be any amount within the range between those prices. However, scenarios are conceivable in which no such range exists because the seller's marginal price exceeds the buyer's. In this scenario, no arm's length transactions between knowledgeable, willing parties are possible. Such a scenario can be likely characterised by low liquidity and/or high information asymmetry and seems to be broadly consistent with what is recently referred to as the ‘credit crunch’. Under this scenario, the IFRS definition of fair value is not readily applicable. Two views are possible: under view 1, fair value refers to the potential buyer's marginal price. Although fair value does always exist conceptually, it negates the notion of two rationally acting parties. View 2 acknowledges that no arm's length transaction is possible, resulting in the fair value notion not being applicable. If these two views are applied to the IFRS definition of an active market, view 1 results in markets that are always active. Only view 2 allows distinguishing between active and inactive markets.

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  • Martin Schmidt, 2009. "Fair Value: Your Value or Mine? An Observation on the Ambiguity of the Fair Value Notion Illustrated by the Credit Crunch," Accounting in Europe, Taylor & Francis Journals, vol. 6(2), pages 271-282, December.
    • Handle: RePEc:taf:acceur:v:6:y:2009:i:2:p:271-282
    DOI: 10.1080/17449480903115829
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    References listed on IDEAS

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    1. Geoffrey Whittington, 2008. "Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View," Abacus, Accounting Foundation, University of Sydney, vol. 44(2), pages 139-168, June.
    2. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    1. Andreicovici Ionela - Irina, 2011. "Examine The Past For Going Further: A Literature Review In The Field Of Fair Value," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 453-458, December.
    2. Okamoto, Noriaki, 2014. "Fair value accounting from a distributed cognition perspective," Accounting forum, Elsevier, vol. 38(3), pages 170-183.
    3. Fülbier, Rolf Uwe & Klein, Malte, 2013. "Financial accounting and reporting in Germany: A case study on German accounting tradition and experiences with the IFRS adoption," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2013-01, University of Bayreuth, Chair of Finance and Banking.

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