Report from EFRAG's fair value conference

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05 Dec, 2017

On 5 December 2017, the European Financial Reporting Advisory Group (EFRAG) hosted a half-day event on the use of fair value in financial reporting in Brussels. We have put together a short report on the speeches and presentations at the conference.

EFRAG Board President Jean-Paul Gauzès welcomed speakers, presenters, panelists, and participants from the standard-setting, regulatory, investor, preparer, and academic worlds to the well-attended exchange of views regarding theoretical and practical aspects of fair value reporting, a topic “that encourages much debate”.

Keynote speaker was Sir David Tweedie, Chairman of the Board of Trustees of the International Valuation Standards Council (IVSC) and former Chairman of the IASB, who spoke on “Valuation experts and accountants: working together”. He noted that valuations undertaken in accordance with generally accepted principles are central to financial stability and for financial reporting under IFRS and US GAAP and that poor valuation practice was identified as a significant contributor to the 2008 financial crisis with a particular focus on financial instruments. Accordingly, the example chosen by Sir David to illustrate problems that need to be solved between valuation and reporting centered around financial instruments. He noted that IAS 39, IFRS 9, and IFRS 13 are not very specific on valuation principles and that regulators have observed huge variation in the valuation of financial instruments. Sir David also pointed at the conflicting approaches between accounting standards and current view of market practitioners.

The next agenda item was a presentation that looked at the theory behind fair value accounting and especially the merits and limitations of fair value in financial reporting. Prof. Mauro Bini noted that including more current estimates of the future in assets and liabilities enhances income’s predictive ability. However, he also noted that historical cost accounting is an anchor for developing forecasts and asked whether fair value can serve for this purpose equally well. He then noted aspects such as an entity’s business model and the question of relevance versus reliability. Prof. Bini concluded that reliability costs of fair value accounting are high and that the net economic benefits of adopting fair value are low, a conclusion afterwards discussed by a panel that included as panelist IASB member Prof. Ann Tarca and Alain Deckers, Head of the Unit ‘Accounting and Financial Reporting’ at the European Commission.

The practice of fair value was the topic of the next presentation “Challenges in using fair value”. After a short discourse into the history of fair value in IFRSs, presenter Henk Oosterhout also turned to the question of relevance versus reliability, noting that relevance is related to a stronger role of financial markets while reliability also means to consider that prices are objective, but values are not. His illustration examples were drawn from the S&P Europe 350 index companies and he noted an increase of the proportion of fair value assets to total assets of listed firms. This required, Mr Oosterhout noted, more voluntary disclosure and better consistency and comparability. He stated that markets generate often more information than assumed, which increased the importance of Management Discussion & Analysis when arguing the often stressed point of increased volatility. Mr Oosterhout’s conclusions were discussed by a panel moderated by Andrew Watchman, EFRAG TEG Chairman and CEO, with Stephen Cooper, analyst and former IASB member, as one of the panelists.

The event concluded with remarks by Filippo Poli, EFRAG Research Director. EFRAG will issue a report summarising the feedback received at the event. The speaker presentations have already been uploaded to the EFRAG website.

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