Fair Value or Cost Method : Analytical Hierarchy Process to Multiple Criteria Problem

The purpose of this paper is to address the crucial problem faced by managers in choosing between fair value and cost method using a systematic and rationale ranking of various criteria. The approach used to solve such problem is the analytical hierarchy process developed by Saaty (1980). The selection is based on a set of criteria including information asymmetry, contractual efficiency, corporate size, earning variability, and cost incurred to appoint an expert. Accounting theory choice has attempted to explain the causes behind the adoption of fair value or cost method and the consequences of such adoption using an econometric methodology. Nevertheless, no attempt has been made to help managers make an accounting decision in a quantitative manner. In order to meet this need, this paper aims to propose a decision making model based on the analytical hierarchy process technique in the selection of the optimal accounting policy for the evaluation of firm's assets. The paper shows that applying the analytical hierarchy process (AHP) model may provide a framework needed to select an accounting policy because it leads to a rationale ranking of different criteria. The paper has implications on the decisions made by managers regarding the accounting policy choice in the wake of the adoption of the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) standards in several contexts worldwide