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Recursivity in standard-setting processes: The measurement case of ‘fair value’ and ‘market value’

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Abstract

Little is still known about how conceptual underpinnings of standards developed at the global level might impact on their potential implementation at the local level and vice-versa. Inspired by a normative approach to standard-setting, this paper draws on the framework of recursivity to explore the role of the measurement objective and bases, as identified in the Conceptual Framework, in standard-setting processes of the International Public Sector Accounting Standards Board (IPSASB). The paper aims to contribute to the scarce literature on standard-setting processes in public sector accounting by drawing on the measurement issue of ‘fair value’ versus ‘market value’. The analysis highlights that uncertainty as to the meaning terms carry can lead to confusion at both the global and the local level, in particular, when the identification of measurement bases does not follow from the measurement objective. This is of practical relevance as it points to the importance of consistency in standard-setting to avoid conceptual mismatches between the global and the local, which may endanger the global standard-setter’s legitimacy.

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Research examining the process of accounting change has focussed upon dramatic changes such as the rise of discounted cash flow analysis. However, much of accounting change centers around recognition issues and serves to expand and enhance the domain of accrual accounting. This paper employs three studies (accounting for loan fees, leases and nonprofit organizations) to examine the process of enacting change in accounting recognition practices. The paper follows the construction of accounting issues as accounting problems within a regulatory space, and the subsequent construction of these problems as appropriate for standard-setting action. The study employs a regulatory space metaphor and a “logic of appropriateness” to examine the complex processes through which accounting change occurs.
Article
This paper analyses various controversial issues arising from the current project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards. It discusses their possible implications for measurement and, in particular, for the use of fair value as the preferred measurement basis. Two competing world views are identified as underlying the debate: a Fair Value View, implicit in the IASB's public pronouncements, and an Alternative View implicit in publicly expressed criticisms of the IASB's pronouncements. The Fair Value View assumes that markets are relatively perfect and complete and that, in such a setting, financial reports should meet the needs of passive investors and creditors by reporting fair values derived from current market prices. The Alternative View assumes that markets are relatively imperfect and incomplete and that, in such a market setting, financial reports should also meet the monitoring requirements of current shareholders (stewardship) by reporting past transactions and events using entity-specific measurements that reflect the opportunities actually available to the reporting entity. The different implications of the two views are illustrated by reference to specific issues in recent accounting standards. Finally, the theoretical support for the two views is discussed. It is concluded that, in a realistic market setting, the search for a universal measurement method may be fruitless and a more appropriate approach to the measurement problem might be to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts. An example of such an approach is deprival value, which is not, at present, under consideration by the IASB.
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