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Fair Value Accounting for Financial Instruments – Conceptual Approach and Implications


  • Dumitru MATIS

    (Babeş-Bolyai University, Faculty of Economics and Business Administration, Cluj-Napoca, România)

  • Carmen Giorgiana BONACI

    (Babeş-Bolyai University, Faculty of Economics and Business Administration, Cluj-Napoca, România)


This study complements the growing literature on the value relevance of fair value by examining the validity of the hypothesis that fair value is more informative than historical cost as a financial reporting standard for financial instruments. We therefore compare the relative explanatory power of fair value and historical cost in explaining equity values. In order to reflect fair values’ role in offering the fair view where financial instruments are concerned we briefly reviewed capital market studies that examine the usefulness of fair value accounting to investors, and discuss marking-to-market implementation issues of determining financial instruments’ fair values. In doing so, we identified several key issues, which need to be analyzed. More importantly, our results suggest that simply requiring fair value, as the reported measure for financial instruments may not improve the quality of information unless appropriate estimation methods or guidance for financial instruments that are not traded in active markets can be established. In contrast, fair value of available-for-sale securities, which are more actively traded in well-established markets, explains equity values more than historical cost. Taken together, our results are consistent with the notion that fair value is more (less) value relevant when objective market- determined fair value measures are (not) available.

Suggested Citation

  • Dumitru MATIS & Carmen Giorgiana BONACI, 2008. "Fair Value Accounting for Financial Instruments – Conceptual Approach and Implications," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 1(2), pages 191-206.
  • Handle: RePEc:wun:journl:tje:v01:y2008:i02:a05

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    Cited by:

    1. Carlos León, 2012. "Implied probabilities of default from Colombian money market spreads: The Merton Model under equity market informational constraints," Borradores de Economia 743, Banco de la Republica de Colombia.
    2. Carmen Giorgiana Bonaci & Adriana Tiron Tudor, 2011. "Fair Value Empirical Studies: An Overview On Acconting Research Literature," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(13), pages 1-1.
    3. Matis Dumitru & Bonaci Carmen Giorgiana, 2011. "Recent Developments Of The Financial Reporting Model: Theoretical Studies In Review," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 629-635, July.

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