FAIR VALUE MEASUREMENT

What will the economic consequences be if the IASB changes accounting standards to require fair value measurement of all assets?

What will the economic consequences be if the IASB changes accounting standards to require fair value measurement of all assets?

Introduction

The essence of the new qualitative characteristic is that it requires judgments about economic substance and real-world economic phenomena, rather than merely the accuracy with which information represents 'that which it purports to represent'. Thus, if fair value were deemed to better capture 'economic substance', historical cost might be deemed to be an inappropriate measure, despite the latter possibly being a more accurate representation of what it purports to represent (historical cost). (Bush, 2005)In QC18, the Discussion Paper attempts, rather clumsily, to explain what it means by a 'real world economic phenomenon'. It asserts that 'deferred charges and deferred credits do not exist in the real world outside financial reporting'. This is, of course, highly controversial: does, for example, purchased goodwill exist outside financial reporting? It goes on to use the easy example of a machine as something that is a real-world economic phenomenon and asserts that original cost is also such an economic phenomenon, but would not be a faithful representation of a three year old machine. In this case, depreciated cost would 'better represent the machine as it now exists' and current replacement cost would be 'even better'. Fair value is offered as another alternative but not evaluated. This example illustrates why those who are opposed to the IASB's alleged intention to extend the use of fair value see the proposals of the Discussion Paper as leaning in that direction. (Penman, 2006)

The type of uncertainty that is unique to recognition, rather than measurement, is what the UK ASB's Statement of Principles calls element uncertainty (ASB, 1999, 5.13-5.15). This is uncertainty as to whether the element exists and meets the definition of an element, and the IASB's criterion of 'probable that any future economic benefit...will flow to the entity' can be interpreted as referring to this type of uncertainty. An asset is not an asset of the entity, and therefore not recognised in its accounts, if its benefits do not flow to the entity. (ASB, 1999) Such 'non-assets' of the entity would include assets whose existence cannot be established with an acceptable level of probability, such as internally generated goodwill. (Walker, 2007) This clearly is an existence (recognition) issue rather than a measurement issue, and the proposed amendment to the asset definition appears to ignore it. The IASB is currently wrestling with that same issue in its revision of IAS37 (liabilities), where it is attempting to define when a constructive obligation should be recognised as a liability.

Measurement also is part of the recognition process (83(b)), but this is in relation to reliability of measurement rather than uncertainty of outcome. It is in this context that the IASB Framework (Para. 85) is potentially confusing, because the example chosen (credit risk on a receivable) appears to relate to measurement of ...