Le Magazine du Trésorier - n°56 - 4ème trimestre 2006 - (Page 13)

DOSSIER THE FAIRNESS OF FAIR VALUE 1.THE FAIRNESS OF FAIR MARKET VALUE From now on the IASB has very clear intentions of introducing the concept of fair value as a primary basis for measuring the amounts reported in the annual financial statements of companies. Gradually, companies have been asked to continue recording assets and liabilities in their balance sheet, taking fair value into account. Although the IFRS’s notion of fair value is essentially based on the market value, many people wonder whether this notion of fair value could be applied in a practical way to assets and liabilities that have no contractual market value available. In these particular cases, is the objectivity and reliability of the IFRS accounting standards and the product accounts of this authoritative accounting literature a guarantee? We should ask ourselves the question. The IASB has decided to adopt what is first of all a definition of market value for the Fair Value (FV). The IFRS mentions an amount for which an asset can be exchanged or a liability can be liquidated or unwound between identifiable or identified parties who wish to proceed with this transaction at acceptable conditions, or ‘at arm’s length’. This market value approach is reflected in the prioritization pyramid of the FV established and developed by the American counterpart of the IASB, the FASB (Financial Accounting Standards Board) and published in the United States in an ‘exposure draft’ (ED) dated June 2004. (1) The price defined by the market value must therefore be adjusted by the removal of transaction costs (estimated). However, transport costs must be incorporated into the fair valuation calculated. The fair value is in fact a realistic exit value. But according to the level of hierarchy proposed by the IASB, a part of this valuation is based on a value judgement, with everything that this entails in the way of uncertainty and error. In the IAS 39 standard, it is stipulated that the ‘bid’ is used for assets and the ‘ask’ for liabilities. However, the ‘mid-price’ is also a possibility. The coherence of the method used is recommended to statutory auditors. At Level III (5 in the IASB table), the combination of valuations is also possible. When we talk to buyers and sellers, it is (cf. chart attached) obvious that it regards an uncommitted and independent counterpart. (1) Addressed during the session of the Financial Instrument Working Group (FIWG) of January 2006 2. THE PRACTICE AND REALITY OF FAIR VALUE Sadly enough, the practical reality is quite different. For many assets and liabilities that should be appreciated and evaluated at their fair value, there is no Level I or Level II valuation or evaluation available (according to the scheme proposed for the IASB/FASB). On the contrary, the fair values have to be determined hypothetically by figuring out what the market price should be if this market or a similar one actually existed. This estimation is often based on hypotheses and elements provided by management. These future hypotheses and the valuation model used will therefore be partially subjective. For example, these hypotheses and models will apply to provisions, the costs related to pensions or assets whose value must be reduced (“asset impairment”). This raises the essential question of knowing whether the hypotheses of the fair value at Level III are sufficiently understandable, reliable, pertinent and comparable to be used for financial reporting. 3. SUBJECTIVITY OF THE FAIR VALUE NOTION Is it not somewhat subjective to call the value that we give to an annual account asset or liability ‘fair’? Within the idea of fair value itself an important element of subjectivity seems to be assumed in many cases. When we read the documents presented by the Le Magazine du Trésorier - N° 56

Table des matières de la publication Le Magazine du Trésorier - n°56 - 4ème trimestre 2006

Sommaire
Editorial
La page des marchés
La parole à... M. Mauro Mazza, Gold Rush
DOSSIER : le contrôle des performances de trésorerie
La parole aux annonceurs
Vie de l'association
EACT
Brèves
Internet

Le Magazine du Trésorier - n°56 - 4ème trimestre 2006