Fair value accounting has always been a topic of controversy, not because people have different preference, but fair value accounting has not been clear cut as other methods of valuation and is subjected to biasness and individual assessment. As mentioned in the article by Dean and Clarke, the convergence and usage of international standards is based on principles rather than rules. Not all firms are from the same industry, so definitely the market prices available would be different thus different measures of fair value. This creates non-uniformity across enterprises and the meaning of fair value becomes even more blurred and ambiguous.
All along, IASB has all the good intention of promoting fair value accounting as it is the academic idea of income at present value growth. This is being questioned if this would encourage more fraudulent accounting as a worldwide phenomenon. With the overly used “true and fair view” defence of IASB, Rayman's article had an interesting way of testing the usage of fair value accounting in a scenario of economic changes in a “utopia of perfectly competitive market” or what I call laboratory scenario. He explained on how fair valued financial instrument's reported value could be misleading because of the requirements in IAS 39 to report a “gain or loss” in valuation in profit and loss. In a nut shell, the scenario came out with a very convincing conclusion that a reported “gain” in valuation could be a real gain only if investors were to actually realize and consume the gain by selling their financial instruments. If the “gain” was not realized, as with most investors to reinvest, an increase in market value over a period might not necessarily represent a gain. This is contrary to IASB's standard that it does. As mentioned by Rayman “there is nothing wrong with fair value in the balance sheet and there is everything wrong with fair value changes in the profit and loss account”. The simple argument is that since the item appears in the balance sheet, it means that that item has not been realized, thus why would the profit and loss accounts be affected. To back this up, the revalued item in the balance sheet would only mean a rejected opportunity (from being realized). So if you have a reported gain that is not realized, would this not be deceptive? As shown in the Utopia example, the supposed gain was actually lesser than what it was supposed to be. In reality, by reporting a gain, stakeholders are actually worse off due to fair value reporting. Not to mention, if the firm was to report a gain but a decrease in dividend receivables as seen in the example, this would actually create discrepancy and lose investor's confidence. To quote Ken Wild from the Robert Bruce article, “this is based on the assumption that users of accounts will not recognize this, analyst know what figures are good and dodgy”, how true.
Admittedly, fair value accounting is very persuasive especially for items that have an active market. But the problem comes in when there is no active market and hypothetical market price mathematical models are used. Apparently, Ernst & Young and Deloitte are on the same side for this issue. Ernst & Young suggested putting the complex calculations in the notes. Although Ernst & Young feels its sensible to embrace fair value accounting, but hypothetical market price calculation is subjective and items become “marked to model” rather than “marked to market”. In addition the calculations become so complex that even top management has problem understanding. So the question is thrown back to IASB, how true and fair is this view? In defence, IASB argues that putting only the complex calculations in the notes loses consistency of presentation and since the companies came up with the calculations, they should be able to explain them.
With fair value accounting stirring up so much of a storm, one could only wonder if it will be beneficial or problematic for stakeholders. Beneficial in the sense that we can see how the company is doing “in today's term”, problematic for users as time goes on, the complexity of the financial reports will increase. If the management could have confusion over their own financial statement figures, what make do of mum and dad investors? Summing up the 3 articles, it shows that IASB as well as the specialist in the accounting field would be constantly on the search for the best way to handle the “Fair Value Accounting” issue.