‘Fair Value’ accounting as the normative Fisherian phase of accounting

ABSTRACT

‘Fair value’ accounting has been described as a new ‘actuarial/forward-looking’ phase of accounting regulations and standards. In this study, we present the hypothesis that ‘fair value’ regulations and standards are aligned with Irving Fisher’s theoretical writings (written more than a century ago) about economic and accounting value, and market prices. Through content analysis, we reveal a literal correspondence of Fisher’s writings to key fair value norms from the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), such as the usage of alleged forecasts of future cash flows and discount rates in explaining market values and prices. Aligning with shareholders/owners interests, Fisher’s theoretical framework can be found in contemporary fair value accounting norms.

KEYWORDS:

• Accounting regulations and standards
• fair value accounting
• historical cost accounting
• mainstream economics
• Irving Fisher

Acknowledgement

The authors thank the editor, Cheryl McWatters, the two referees, Garen Markarian and Charles Richard Baker, along with Julia Smith, John Ferguson, Maria Nazaré Barroso, Frederick Lee, Andrew Marshall, Christine Cooper, Tae-Hee Jo, and participants in conferences for reading and commenting on an earlier version of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Tiago Cardao-Pito http://orcid.org/0000-0002-0513-9306

Notes

1 We use for the concept of norm, in ‘accounting norm’, the same definition that can be found in Merriam Webster Dictionary online: ‘1 : an authoritative standard 2 : a principle of right action binding upon the members of a group and serving to guide, control, or regulate proper and acceptable behaviour.’

2 Therefore, ‘fair value’ systems are based on volatile and inexplicable temporary market values (level 1 and 2) or speculative models of unpredictable future events (level 3) (Bromwich 2007; Power 2010; Ravenscroft and Williams 2009).

3 Bryer (2015, 42) claims that Richard’s typology of accounting periods is itself aligned with mainstream economics because it explains broad historical changes due to the same need: namely, impatience for consumption. According to Bryer (2015), Richard does not attempt to locate his accounting history in the changing social, political, economic and ideological contexts of his countries, both inside and outside business entities (i.e. including management and financial accounting). Bryer (2015, 35) observes that ‘only by conducting such challenging comparative international research will we realise the promise of critical accounting history.’

4 Although beyond the scope of this study, Fisher is open to considering human beings as wealth or capital when they appear to have these properties (see Fisher 1906, 6 or Cardao-Pito 2016 for more details).

5 Fisher’s major books and articles, with editorial commentary and selections from his correspondence, are in Barber’s (1997) 14 volumes. Secondary sources about Fisher’s economic framework can be found in Fellner (1967), Loef and Monissen (1999), Dimand and Geanakoplos (2005), the April 2013 issue of the European Journal of Economic Thought and the June 2013 issue of the Journal of the History of Economic Thought. Comprehensive biographies about Fisher can be found in Allen (1993) and Fisher (1956), where the author of the volume is Irving Fisher’s son.

6 Notes: 1) Fair value norms can be found in other regulations. 2) For the IASB, IFRS 13 replaces IAS 39 in terms of fair value appraisal methodologies, whereas IFRS 9 replaces IAS 39 in terms of describing and treating financial investments.

7 For instance, ‘fair value’ had a very different meaning in Pixley (1881, 130) or Lisle (1904), where it was not used to convey models that could allegedly explain market prices.

Additional information

Funding

This work was supported by the ADVANCE/CSG Research Center at ISEG, and Portuguese national funding agency for science, research and technology (FCT) Project-UID/SOC/04521/2013.