FAIR VALUE ACCOUNTING

Fair Value Accounting



Fair Value Accounting

Introduction

Accounting standards bodies are currently refining their proposals for the introduction of additional elements of fair value accounting for financial instruments. The ECB has a keen interest in this debate, as accounting reforms are likely to have a profound impact on the banking and financial industry. Furthermore, harmonised and high-quality accounting standards could make a significant contribution to the integration and efficiency of financial markets in the euro area (Swartz, 2003). On a broader scale, they could also facilitate European firms' access to the large international financial markets, thereby promoting growth.

The interest of the ECB also stems from the concerns that a wider application of fair valuations might have adverse effects on financial stability. The consistency between the accounting framework and the reporting for supervisory and statistical purposes is also an aspect deserving due attention.

The reach, scope, and size of many large companies have created significant pressures from different groups in society for better corporate citizenship and greater attention to the ethical values that underpin it. These pressures are highlighted by the fact that, by 2002, 51 of the world's largest economies were said not to be countries but companies. In part, it is this spectacular size and attendant power that have created much of the attention to corporate citizenship, fueled further by concerns about globalization's impacts; management practices of outsourcing key functions to developing nations to reduce costs; ethical and accounting scandals; and corporate influence on governments, communities, and whole societies (Mintz, 2008).

Analysis

During the 1990s and into the 2000s, there was a great deal of activism against certain corporate practices such as outsourcing, which frequently involved contracting with manufacturers in developing nations whose workers were subjected to abusive conditions, ecological deterioration, and poor labor standards, as well as the impact of globalization. This activism generated a flurry of development of codes of conduct that attempted to codify how such basic principles could be put into practice in companies. As the codes developed, many companies, particularly large multinational firms with brand names to protect, began demanding that their suppliers live up to the standards articulated in the codes (Needleman, 2006).

Many companies developed their own codes of conduct; in addition, a number of codes emerged that were developed by multisector coalitions working from internationally agreed documents or core ethical standards. Among the most prominent, although not without its critics, was the United Nations' Global Compact's set of 10 (originally nine) principles, which were drawn from internationally agreed declarations and treaties. The Global Compact, which had nearly 2,000 members by 2005, was established in 1999 by UN Secretary-General Kofi Annan to “initiate a global compact of shared values and principles, which will give a human face to the global market.” In signing onto the Global Compact, companies agree to uphold 10 fundamental principles on human rights, labor rights, environment, and anticorruption (Lay, 1990).

The Global Compact's 10 principles focus on core or foundational principles and are drawn from major UN declarations and documents that have been ...