Abstract
With the purpose of reporting high-quality, transparent, and comparable information in financial statements, there is a strong, visible trend towards the implementation and use of International Financial Reporting Standards (IFRS), which represent the Anglo-American accounting model. According to IFRS, the fair value has become a dominant measurement paradigm. The purpose of this paper is to examine the implications of the implementation of the mark-to-model fair value measures for asset impairment tests on the relevance and reliability of information presented in financial reports. Among the three levels of the fair value hierarchy, mark-to-model is most controversial because it is susceptible to manipulation and has poor verifiability. After a systematic literature review and a synthesis of high-quality contributions in this field, we conclude that the implementation of asset impairment tests, that use the mark-to-model fair value measures, is not promising for increasing the quality and reliability of the information presented in financial statements. Unfortunately, research has shown that companies are using that tool to manage their earnings and promote managers’ unethical behaviour. Furthermore, capital markets’ reaction to asset impairment announcements is negative. Performed analysis can provide valuable pointers for standard setters, accounting policy makers, and researchers.
Highlights
As suggested by Coase [1], whenever an economic theory attempts to discover the most effective way to organise business operations, the technical tools of their implementation depend on the accounting
The main aim of the paper is to analyse the current state-of-the-art, concerning the influence that the mark-to-model fair value accounting has on International Financial Reporting Standards (IFRS) asset impairment tests, in terms of the quality, comparability, and perception of information presented in financial statements
In the research presented in prestigious journals, we noticed a lack of unambiguous research results. The lack of such results may indicate an increase in the quality of information shown in financial statements after the adoption of asset impairment tests through more-timely information about the contemporary economic losses (“impairments”) on long-term tangible and intangible assets [12], and more accurate value of the firm, or at least a fraction of it, which is the aim of the fair value accounting rules [13]
Summary
As suggested by Coase [1], whenever an economic theory attempts to discover the most effective way to organise business operations, the technical tools of their implementation depend on the accounting. As highlighted by Nobes [2], there are two classes of accounting models. The Anglo-American model is adopted in countries with a strong capital market and orientation towards external shareholders. The Continental (European) model focuses on creditors’ and other stakeholders’ information requirements, especially those of tax authorities. The realisation of this concept may be recognised mainly in countries with a weak capital market. The aim of the Anglo-American model is to inform equity investors and allow discretion in the preparation of financial reports, as far as the resulting statement provides the “true and fair value”. The Continental model concentrates on the creditors and requires highly codified reporting [3]. The Anglo-American model is neutral, whereas the Continental model is prudent and focuses on preventing assets’ over-valuation by setting the book value higher than the market value
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