A Critical Review of the Article, “Fair value accounting, financial economics and the transformation of reliability ‘ (Michael Power, 2010) By McCoy A Critical Review of the Article, “Fair value accounting, financial economics and the transformation of reliability’ (Michael Power, 2010) “Fair value accounting, financial economics and the transformation of reliability’ addresses the question that how and why fair value accounting is increasingly significant over two decades.
The author: Michael Power, is the director of the Centre for the Analysis of Risk and Regulation at ELSE, the fellow of the Institute of Chartered Accountants in England and Wales (ICE) and an associate member of the I-J Chartered Institute of Taxation (ELSE, 2013). This review aims to evaluate the merits and limitations of given Journal article by examining the arguments made together with criticizing them according to other relevant resources.
Summary: In summary, the arguments made by author focus more on the underlying four key conditions of possibility for the rise of fair value, which ultimately lead to a conclusion that although there were still considerable controversies and oppositions led by some policy makers, practitioners and scholars, fair value is still increasingly necessary to be applied as an abstract principle and represents a global aspiration (page 208/209).
Analysis: Firstly, the author suggests the use of fair value in accounting is grounded in the cultural authority of financial economics; it takes place against the background of ‘larger transformations in financial markets’ (page 201). Clear and abundant evidences are used by author to prove the standpoint, such as citing from Whitley about the seemingly descriptive MME theory and from Hoped about the important ole of academic knowledge in financial economics (page 202), etc.
Therefore, the fair value is articulated as an abstract principle, which is considered as a “rational myth”. The accuracy of this point can also be verified by referring to the statement of Birth and Landsman (1995, p. 99), they mention that the fair value unambiguously equals real market value only in a perfect market. Furthermore, Million (2008, p. 295) also illustrates the efficient market hypothesis (MME) is widely accepted to be the fundamental theory for the application of fair value.
Secondly, the author points out the catalytic role of derivatives for the development f the fair value and the function of Joint Working Group in construction of fair value as an abstract principle (page 204). The reliability can also be proved by checking the references quoted by author. More supports can be seen from Emerson et al. (2010, p. 80), who agree with Power that the grown diversity of financial instruments brings more valuation issues, quoted from Jones (1988), and those value problems offer fair value a platform to expand.
Moreover, Martin Rick (2010, p. 38) also mentions that the derivatives must be fair valued for carrying out the price protection provisions in financing orientations. Then, the Journal introduces the influence of the transformation of balance sheet from a Juridical into an economic institution on the development of the fair value. Although the author’s own analyses are quite reasonable to be accepted, No proof from other Journals is demonstrated by Power. Evidence should be added, such as, mentioned by Stiletto (2010, p. 64), although not exactly the De-legalization of balance sheet has been pointed out, one of the features suitable for arise of the fair value is Liberalizing, such as deregulation of regulatory framework in all economic areas. Finally, Power also deeply analyses the professionalisms accounting standard- setters as actors in a world governance system (page 208). This point of view not only well-proved by Power through referring to valuable literatures, but also can be seen by checking other Journals, such as Evanescent and Biostatic (2011, p. ) expressed that there are a number of issues that standard-setters must balance with respect to fair value accounting, such as relevance and reliability, which will required the professional skills of standard-setters. In addition, Landsman (2007, p. 20) also gaslights in his article that in order to ensure the relevance and reliability of fair value, current fair value standards require modification, and future standards need to be addressed, which implies, only the standard setters become more professional, those problems can be solved easily.
The four points are all well written with reasonable arguments and valuable quotations, which ultimately help the author reach to a conclusion that the mutually reinforce of those four conditions help to explain the rising significance of the fair value as an abstract principle, promoted by a minority in the face of considerable oppositions (page 209), only except the influence of transformation of balance sheet need further researches. However, there are still some questionable and arbitrary arguments somewhere.
Power (page 199) claims one of the motivations to use fair value is to minimize the freedom to manipulate accounting numbers, which only cited form SFA Institute, insufficient resources are given by the author to prove the popularity of this opinion, in contrast, according to Shortage et al. (2006, p. 37), it is the historical cost that produce earnings numbers that are not based on appraisals or other valuation quenches, which will lead income statement less likely to be manipulated by management.
In addition, Power’s optimism about the real effects of the ‘imaginary world of fair values (page 209) should be more concerned, since many analysts actually worried about the effect when putting fair value into practice. For instance, As Evanescent and Biostatic (2011, p. 3) quoted in Journal, ‘Pounded (2010, 15) concludes that “conceptually, the measurement of fair value under U. S. GAP is straightforward,” but he goes on to say that “complications arise … Hen reporting entities go to apply this concept in practice” What is more, as we mentioned before, the scholars who illustrated the perfect market is the base for fair value, also pose suspicions on whether ‘rational myth’ can come true. Conclusion: To sum up, this article is logically written and the author offers sufficient rational and precise references to support the possibility for the rise of the fair value. There are only two questionable and arbitrary arguments could be paid more attention to.