The Value Relevance of Fair Value Accounting to Market Returns

Around the world, financial statements are prepared to be interpreted by internal and external users. Traditionally, the view on accounting and its role differ around the world1. This variation can be due to culture, legal or economic reasons. Traditionally there is a difference between the Anglo-Saxon parts of the world and continental Europe. To generalize, accounting regulations in the Anglo-Saxon countries is focused on informing outside investors, giving grounds for investment decisions. The regulations in continental Europe is more focused on being precise and stabile, and to ensure the rights of creditors and governments2.

The International Accounting Standards Board (IASB) aims at minimizing these differences3. To achieve this, the IFRS framework was introduced for listed companies within the European Union in 20054. The implementation of IFRS 2005 posed several new things, such as fair value accounting for real estate and biological assets. The framework has been criticized for being too detailed in its recommendations, and for putting to much focus on market values. It has been argued that the fair value regulations are a movement towards a more Anglo-Saxon type of accounting, and that increased focus on market values could imply a risk of increased arbitrariness5. Critics also claim that the fair values stipulated in the framework was one of the reason for the sharp shift in the economy following the financial crisis during 20086.

Fair value accounting is described in the standards IAS 39 – Financial Instruments: recognition and Measurement, IAS 40-Investment Property and IAS 41- Agriculture. These prescribe the accounting treatment of financial, real estate and biological assets respectively. They state that assets recognized according to these standards should be measured at fair value, and that the fair value should reflect market conditions at the end of the reporting period7.