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Problems associated with the Value-Relevance of Financial Derivatives according to IAS 39

  • Juettner-Nauroth, Beate E.


    (University of Applied Sciences of the Deutsche Bundesbank)

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    This paper studies some fundamental issues concerning the relation between market value of equity and the fair value of financial derivatives determined according to International Accounting Standard No. 39, Financial Instruments: Recognition and Measurement (IAS 39) in non-aktive markets. It is shown that the fair value of a financial derivative is not relevant in a non-active market. It is also demonstrated that in a setting of a non-active market, determining the fair value under the fiction of an active market does not take all available information into account. Additionally, it is noted that the definition of fair value in non-active markets according to IAS 39 has two consequences: (i) The market value of equity at the balance sheet date reflects the company's value in a fictive market situation. (ii) The fair value calculated by one valuation model is in general not unique.

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    Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Business Administration with number 2003:2.

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    Length: 31 pages
    Date of creation: 10 Jan 2003
    Date of revision: 07 Feb 2003
    Handle: RePEc:hhb:hastba:2003_002
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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. J. E. Stiglitz, 2000. "Conclusions," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(1), pages 145-151, 02.
    3. Lys, Thomas, 1996. "Abandoning the transactions-based accounting model: Weighing the evidence," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 155-175, October.
    4. Venkatachalam, Mohan, 1996. "Value-relevance of banks' derivatives disclosures," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 327-355, October.
    5. Skinner, Douglas J., 1996. "Are disclosures about bank derivatives and employee stock options 'value-relevant'?," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 393-405, October.
    6. Varian, Hal R, 1987. "The Arbitrage Principle in Financial Economics," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 55-72, Fall.
    7. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    8. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
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