The Decision Usefulness of Fair Value Accounting - A Theoretical Perspective
Regulators such as the SEC and standard-setting bodies such as the FASB and the IASB argue the case for the conceptual supremacy of fair value accounting vis-à-vis the traditional transaction-based model, notably on the relevance dimension. Recent standards on financial instruments and certain non-financial items adopt the new measurement paradigm. This paper takes issue with the notion of superior decision usefulness of a fair value-based reporting system, with an emphasis on the theoretical soundness of the arguments put forward by regulators and standard-setting bodies. The research is based on the premise that conceptual reasoning not only represents a worthwile approach to accounting research, but is of particular importance for the a priori evaluation of accounting alternatives from a standard-setting perspective. Two approaches to decision usefulness are considered, the measurement or valuation perspective and the information economics perspective. Findings indicate that the decision relevance of fair value reporting can be constructed from both perspectives, yet the conceptual case is not strong. Notably, the hypotheses underlying standard-settings shift towards a fair value-based model turn out to be theoretically weak. One immediate implication of the research a condition for the further implementation of fair value accounting is the need to clarify standard setters notion of accounting income, its presumed contribution to decision relevancy and its disaggregation.