Problematising the decision-usefulness of fair values: empirical evidence from UK financial analysts

Abstract

In its recently revised conceptual framework, the IASB re-affirms decision-usefulness as the objective of financial reporting, disregarding claims about its lack of coherence. In this paper, we examine how this notion of decision-usefulness works in practice by focusing on the case of fair value measurement. In particular, we explore how decision-usefulness is perceived and experienced by financial analysts when using fair values in their work. We use the frame of ‘problematisation’, which involves challenging assumptions in existing literature, to formulate our research question and to interpret our findings. Empirical evidence, drawn from interviews with UK financial analysts and comment letters analysts wrote to the IASB, puts into question three key assumptions inherent in the revised conceptual framework. First, fair values are not considered to be unquestionably useful to decision-making; second, this usefulness is found to be contingent on the context of the decision being made; and third, the qualitative characteristics required to achieve decision-usefulness are challenged for their lack of meaning. Analysts’ testimonies also challenge taken-for-granted assumptions implicit in academic studies. Assumptions that the decision-usefulness of fair values can be established prior to practice are re-evaluated. We also reflect on the premise that the decision-usefulness of fair values can be challenged on its underlying market-based economic rationales. Overall, our findings contribute to thinking problematically about decision-usefulness which appears to be contingent rather than given by some predetermined ideals as envisaged in accounting conceptual frameworks.

Keywords:

• decision-usefulness
• fair values
• conceptual framework
• problematisation
• IFRS
• standard-setting

JEL descriptors:

• M41

Acknowledgements

We would like to thank Bertrand Malsch, two anonymous reviewers, Christine Helliar, Chris Humphrey, Michael Jones, and Roland Königsgruber for their helpful comments and suggestions on earlier drafts of the paper. We also acknowledge the comments from conference participants at the 2018 BAFA Conference (London), the 2019 Alternative Accounts Conference (Kingston, Ontario), the 2019 European Accounting Congress (Paphos), and the 2019 Workshop on the Politics of Accounting (Manchester).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Decision-usefulness has served as the stated rationale for setting accounting standards since the 1970s. For a history of the emergence and development of decision-usefulness see Murphy et al. (2013), Williams and Ravenscroft (2015), Young (2006), and Zeff (2013). For a discussion of how decision-usefulness was implicated in developments in narrative reporting see Chahed (2020).

2 Even though the use of market values in practice has a longer history, concepts of fair valuation gained prominence in standard-setting debates from the 1990s onwards. For a historical overview, see Georgiou and Jack (2011) and Whittington (2015).

3 The IASB states that the way in which an asset or liability contributes to future cash flows depends, in part, on the nature of business activities conducted by the entity. Against concerns that this may lead to subjectivity, the board assumes that in many cases the nature of an entity’s activities is a matter of fact, not an opinion or management intent (para. BC6.40).

4 This emphasis on predicting future cash flows is premised on knowledge claims of financial economics (Baudot 2018, Chahed 2020, Morley 2016, Pelger 2016, Power 2010, Pucci and Skærbæk 2020) and reliance on market mechanisms of rationality and economic efficiency to interpret accounting events (Williams 1987).

5 Further efforts to establish contacts were made using an announcement to the ‘Equity Research Analysts’ networking group on LinkedIn. The announcement stipulated the nature of the research and sought responses from those interested in participating. There were no responses to this invitation.

6 At the time the interviews were carried out the 2010 version of the conceptual framework was in place, which updated the objective of financial reporting and the qualitative characteristics of useful financial information. Although discussions about incorporating measurement principles in the conceptual framework were underway, these were first presented by the IASB in its 2013 discussion paper and revised in its 2015 exposure draft. The comment letters therefore provided us with analysts’ views in relation to how the principles were formally developed in the revised conceptual framework.

7 All examples used by interviewees are anonymised here.

8 The CFA Institute is interpreting the business model approach for deciding how to measure items as a contrast to a market-based approach to measurement. The concerns therefore raised are in line with the Institute’s view that fair value accounting provides the most decision-useful information (see especially letter 2014). As Georgiou (2018) shows this view by the CFA Institute is not mainly shared by individual users of financial reports.