Fair Value in Finance: Fifty Shades of Fairness

Olga Volkova

Journal of the New Economic Association, 2018, vol. 39, issue 3, 85-109

Abstract: We discuss the content of the concept of fair value, practices and consequences of its application in accounting and finance, its interplay with other social and economic concepts. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an alternative to the valuation of assets and liabilities at historic cost, which has been used in accounting and finance for several centuries and has ceased to fully satisfy markets in the last third of the twentieth century. The paper discusses the nature of fair value, the reasons and peculiarities of the implementation of this concept into the financial practices. It is shown that the main reasons for this are the financialization and the advance of transparency in economics and society. The role of fair value in the economic crisis of 2007-2009 is illustrated by two mechanisms: the blowing-up the book values of assets and the companies' plays in high volatility financial markets. The focus of discussion is on the effects of fair value: procyclicality in the financial markets, the perils for sustainable development, professional alterations (ethical and practical). The relationship between fair value and the concepts of honesty and fairness is analyzed. It is argued that despite all its shortcomings, FV fully meets the principles of fairness in regard to financial markets.

Keywords: fair value; financial markets; financial reporting; transparency; financial crisis of 2007-2009; prociclicality; fairness; professional ethics (search for similar items in EconPapers)
JEL-codes: A13 A19 D8 G01 G19 M14 M4 O16 (search for similar items in EconPapers)
Date: 2018
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