College 1: Baker and Schulte 2017

Introduction of the idea of Fair Value;

IFRS 13: emphasis on current market price as a guide to economic decision –making;

Implication: market ontology=> no distinction between different types of fair value;

However, IFRS 13 explicitly acknowledges three levels of FV;

Level 3: IFRS 13 requires hypothetical market and simulations as if market exists.

Beliefs about fair value are shared by everyone (collective intentionality & acceptance), because it said to be so (status function declarations)

Beliefs about fair value are shared by everyone (collective intentionality & acceptance), because it said to be so (status function declarations)

This creates institutions (=ontologically subjective);

Creates institutional facts (=epistemologically objective) => entity-specific instead of market-specific?

Creates institutional facts (=ontologically objective) => entity-specific instead of market-specific?

This creates institutions (=epistologically subjective);

Accounting as History:  Information that is reliable  Historical Cost Accounting  [Record keeping]

Accounting as Economics:  Information faithfully represents market signals and expected cash flows  Fair Value Accounting

accounting is the translation of economic “reality” into the balance sheet

To estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions’

Among their many functions, markets are systems that transmit information in the form of prices.

markets are systems that transmit information

Marketplace participants attribute prices to assets and, in doing so, distinguish the risks and rewards of one asset from those of another

Markets are systems that transmit information

Marketplace participants attribute prices to assets and, in doing so, distinguish the risks and rewards of one asset from those of another

Consensus view about an asset or liability

there is a single, unifying ‘market price

Market price is an unique outcome of the market, no other value exists

Market price is an unique outcome of the market, no other value exists it does not depend on any metaphor, it just exists

Data are observable inputs other than Level 1 data,

There should be distinction in IFRS 13 between different ‘types’ of fair value

Data are quoted prices in active markets, while

The solution of IFRS 13 is epistemological diversity

Level 1’ data are quoted prices in active markets, while (Onaangepaste genoteerde prijzen in actieve markten voor identieke activa en verplichtingen . Voorbeeld: Slotkoers op Euronext)

Level 2’ data are observable inputs other than Level 1 data (Genoteerde prijzen voor soortgelijke activa en verplichtingen in actieve markten of inputfactoren die gebaseerd zijn op of ondersteund worden door waarneembare marktgegevens. Voorbeeld: Prijzen per vierkante meter afgeleid van prijzen in transacties van soortgelijke gebouwen in hetzelfde geografische gebied.)

Level 3’ data are unobservable, meaning that they are the preparer’s own assumptions about ‘the assumptions that market participants would use when pricing the asset’ (IFRS 13, para 87). (iet-waarneembare inputfactoren voor het bepalen van de reële waarde van een actief of verplichting. Voorbeeld: Netto-contantewaardeberekening op basis van aannames van marktpartijen.)

there is a single, unifying ‘market price’

considered from the perspective of a market participant

not identify specific market participants

obtain information about market participant assumptions

clear distinction between the reporting entity and the market participant

an entity uses assumptions that market participants would use when pricing the asset

Intentionality (“what are you trying to do?”)

Collective Intentionality (“what are we all trying to do together?”)

Status function declarations (“ have we made it clear to everyone what we try to do as a fact”?)

ontological and epistemological status of institutional facts

Institutions are rules of society to create assets and liabilities

Institutions are rules of society to create assets and liabilities

IFRS standards are rules of accounting to create assets

fair value of assets & liabilities

Collective Intentionality = a market is a setting where agents try to determine the “right” price

Status function declarations = the price quoted on the market is “in fact” the right price, i.e. the fair value.

ontological status: Ontology: [“ontos=being, that which is” – “logos= the study of-” ; “logia= logical discourse]” >>> Does it’s really exist?

it is a network where market transactions and environmental context coexist

No, it is a network where market transactions and environmental context coexist.

Yes, it is a network where market transactions and environmental context coexist.

No, IFRS 13 is subjective for both Level 1 & 3, because it depends on what someone consider to be the market.

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Transferring the problem elsewhere

Finding an expedient solution

Narrowing the problem to make it more tractable

Speculative thinking

Different practices emerged (no acceptance of one status function declaration)

Very Limited use of Level 1: core-assets are very specific, CGU can not be separated & very difficult to determine the correct market discount rate

One way to deal with this is to let another party determine the fair value: for instance the auditor (this makes it entity-specific)

Different practices emerged (no acceptance of one status function declaration)

Speculative thinking

profit is change in (market) value. There is flexibility in to what you can consider market value

in practice, accounting was more conservative, with focus on historical cost

fair values are introduced in a select group of standards

This paper questions the main premise of IFRS 13, that Fair Value for non-financial assets always faithfully represents the economic ‘reality’.

Faithful representation (previously called relevance) stands opposite to reliability, so a focus on faithful representation marks a metaphorical shift in what the IASB emphasizes in their standards. Is this shift consistent with Searle’s notion of ‘reality’?

Does Fair Value represents an objective reality or a subjective reality?

This paper questions the main premise of IFRS 13, that Fair Value for non-financial assets always faithfully represents the economic ‘reality’.

Faithful representation (previously called relevance) stands opposite to reliability, so a focus on faithful representation marks a metaphorical shift in what the IASB emphasizes in their standards. Is this shift consistent with Searle’s notion of ‘reality’?

Critical Question of this paper: does Fair Value represents an objective reality or a subjective reality?

This paper questions the main premise of IFRS 13, that Fair Value for non-financial assets always faithfully represents the economic ‘reality’.

Faithful representation (previously called relevance) stands opposite to reliability, so a focus on faithful representation marks a metaphorical shift in what the IASB emphasizes in their standards. Is this shift consistent with Searle’s notion of ‘reality’?

Critical Question of this paper: does Fair Value represents an objective reality or a subjective reality?

Fair Values are (1) either reported as preexisting institutional fact (Level 1), or (2) ‘made-up’ representations (level 2 & 3). However, firms that report under IFRS are required to apply IFRS 13.

Transferring the problem elsewhere

Narrowing the problem to make it more tractable

Finding an expedient solution