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The Decision Usefulness of Fair Value Accounting - A Theoretical Perspective

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  • Joerg-Markus Hitz

Abstract

Regulators such as the SEC and standard setting bodies such as the FASB and the IASB argue the case for the conceptual desirability of fair value measurement, notably on the relevance dimension. Recent standards on financial instruments and certain non-financial items adopt the new measurement paradigm. This paper takes issue with the notion of decision usefulness of a fair-value-based reporting system from a theoretical perspective. Emphasis is put on the evaluation of the theoretical soundness of the arguments put forward by regulators and standard setting bodies. The analysis is conducted as economic (a priori) analysis. Two approaches to decision usefulness are adopted, the measurement or valuation perspective and the information perspective. Findings indicate that the decision relevance of fair value measurement can be justified from both perspectives, yet the conceptual case is not strong. The information aggregation notion that underlies standard setters' endorsement of fair value measurement turns out to be theoretically restricted in its validity and applicability. Also, comparative analysis of fair value accounting vs. historical cost accounting yields mixed results. One immediate implication of the research - a condition for the further implementation of fair value accounting - is the need to clarify standard setters' notion of accounting income, its presumed contribution to decision relevance and its disaggregation.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:euract:v:16:y:2007:i:2:p:323-362
    DOI: 10.1080/09638180701390974
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    1. Lawrence J. White, 2003. "The Savings and Loan Debacle: A Perspective from the Early Twenty-First Century," Working Papers 03-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
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