The Routledge Companion to Fair Value and Financial Reporting

Citation

Fisher, R. (2010), "The Routledge Companion to Fair Value and Financial Reporting", Pacific Accounting Review, Vol. 22 No. 3, pp. 272-274. https://doi.org/10.1108/01140581011091701

As many a scholar, student, and practitioner of accounting will have experienced, fully comprehending the concept of fair value necessitates an extensive and often frustrating review of literature encompassing a wide array of texts, professional pronouncements, and journal articles. Noting the lack of a single comprehensive source on the topic, the editor of The Routledge Companion to Fair Value and Financial Reporting, Peter Walton, took on the ambitious task of producing a text designed to fill this void – one which simultaneously considered the relevant issues from multiple perspectives and was informed by the views of experts in the field, including academics, standard setters, or practitioners.

The book consists of three sections and 26 chapters. The first section, Section I: Introduction, contains five chapters which together introduce the concept of fair value. Chapter 1, written by the editor, briefly presents an outline of the book, together with a high level summary of historical references to fair value and the nature of its current use by standard setters. Chapter 2 expands on the preceding chapter by discussing the evolution of fair value in the context of International Financial Reporting Standards (IFRS). Several helpful tables are included outlining the use of fair value in the initial and subsequent measurement of particular assets and liabilities with cross references to specific standards. Chapter 3 provides an experienced valuer's (Alfred King) critical (and largely subjective) assessment of the Financial Accounting Standards Board's (FASB) SFAS 157 Fair Value Measurements (now referred to as Topic ASC 820 Fair Value Measurements and Disclosure). These views are juxtaposed with those of a standard setter, Ian Hague, who forcibly argues the case for fair value in Chapter 4. In arguably one of the stand out chapters in this volume, Chapter 5 “Fair values: imaginary prices and mystical markets”, Michael Bromwich critiques fair value based on a review of its various definitions, underlying assumptions (both explicit and implicit), and supporting arguments. The chapter concludes with a summary of important concerns that need further explanation and research.

Section II: Theoretical analysis, consists of 11 chapters which, the editor claims, puts “fair value into different contexts” (p.3). The first chapter to this section (Chapter 6) reviews the recent history of fair value. In this chapter, David Alexander uses and extends the influential work of Edwards and Bell (1961) in order to locate fair value (as defined by the IASB) among an array of possible value concepts. Chapter 7: “Fair value and valuation models” presents a primer on the models which underpin a growing body of capital market (value relevance) research, the results of which have been widely used to support the relevance of fair value information to investors by standard setters and other proponents of fair value. In Chapter 8, Warren McGregor provides a balanced and thoughtful chapter, which contemplates the likely future role of fair value measurement in financial reporting standards. The chapter goes some way to dampen (unwarranted) fears that accounting standard setters intend to ultimately introduce fair value on a comprehensive basis. A pragmatic perspective is also adopted by the author of Chapter 9 “Between a rock and a hard place”, Andrew Lennard, who concludes his chapter in support of a mixed measurement system. Chapter 10 “Fair value and capital markets” extends the theme of Chapter 7 by synthesising the findings of relevant empirical research in capital markets.

Given the rich heritage of theoretical debate surrounding current value measurement systems in the Antipodes, it was pleasing to see Chapter 11 dedicated to providing an Australian perspective on fair value measurement. Although touching on the work of Ray Chambers, Kevin Stevenson draws mainly on the seminal work of Edwards and Bell (1961) and the more recent work of Van Zijl and Whittington (2006) in reflecting on the appropriateness of fair value as a measurement basis. While Chapter 12 focuses on the concept of measurement, the definition of assets, and fair values, Chapter 13 draws interesting historical parallels between the rise and fall of current cost accounting (CCA) in the 1980s and the ongoing development of fair value accounting. In Chapter 14 “Alternatives to fair value”, Geoffrey Whittington reminds us that fair value is a relatively new concept and, although embraced by standard setters, does not have strong theoretical underpinnings or even, at the time of writing, a consistent definition. Whittington logically traverses the alternatives and mounts a strong case for restated deprival value. Allister Wilson critically examines the reliability of fair values in Chapter 15, while the last chapter of Section II, Chapter 16, focuses on the application of fair value to debt and equity.

Section III comprises ten chapters and adopts an applied focus to fair value measurement. The section will have particular appeal to readers having a practitioner background. The first of the section's chapters, Chapter 17 “Fair value accounting: a cautionary tale from Enron”, is a reprint of (the late) George Benston's notable Journal of Accounting and Public Policy article of the same title, and outlines the potential for management abuse of fair values, particularly in relation to Level 2 and 3 measurements. The remaining chapters cover fair value issues: in the insurance industry (Chapter 18); in the corporate, insurance, and banking sectors (Chapter 19); from an auditor's perspective (Chapter 20); from a US and Japanese perspective (Chapter 21 and Chapter 22, respectively); for pension accounting (Chapter 23); for developing countries and SMEs (Chapter 24); for financial instruments (Chapter 25); and, last, in relation to impairment testing (Chapter 26).

What makes this book a particularly valuable contribution to the literature is that no authoritative and detailed analytical case has been put forward by standard‐setters for the use of fair value accounting. By standard‐setters, I am specifically referring to the IASB and FASB. The book serves to highlight the rapid and somewhat haphazard evolution of fair value accounting, and goes some way to illuminate the more salient missing pieces of the fair value puzzle. For instance, Michael Bromwich's chapter (Chapter 5) is particularly helpful in making explicit many assumptions that are implicit in the concept of fair value, as conceived by standard‐setters. I enjoyed the contrasting views presented by the many contributors to this volume. Their disparate backgrounds contribute to a lively debate and make it clear that the future of fair value will more than likely reflect a triumph of pragmatism over purism.

There are a number of aspects to this text, however, which detract from its overall coherence and ought to be considered. In particular, the lack of a clear organising structure has led to a patchwork of topics and perspectives. The logic underlying the ordering of chapters is far from obvious. For instance, it is unclear why the two chapters dealing with capital market research (Chapters 7 and 10, respectively) are separated. Further, the seemingly wide latitude afforded to the contributors to this volume has resulted in significant overlap in topics across chapters, particularly in relation to background information such as the history of fair value and explication of its official definitions. Significantly, there is also no concluding chapter, synthesising and balancing the varied views of the book's contributors. The absence of chapter abstracts and relatively low use of inter‐chapter cross referencing also impinge on the book's readability. Although the topics covered in this book are comprehensive, I would have liked to have seen more emphasis in the following two areas. First, at least an overview of the debate surrounding the relevance of value relevance research (e.g., Holthausen and Watts(2001)) within either of Chapters 7 or 10, respectively, and second, more detailed consideration of IAS 41 Agriculture – a comprehensive fair value standard.

Overall, I found the book an interesting and informative read. I would recommend the book as a springboard for researchers new to the area, and as a general reference for accounting and auditing professionals. The book is not a textbook but might usefully be used selectively as reference material supporting upper‐level undergraduate and postgraduate financial accounting courses.