Representing the market perspective: Fair value measurement for non-financial assets

Abstract

Fair value measurement (FVM) in IFRS calls for a market-oriented representation of economic ‘reality’, whereby the values attributed to rights (assets) and obligations (liabilities) are in principle determined from the perspective of the ‘market participant’ rather than that of the reporting entity. We argue, however, based upon Searle’s analysis of institutional reality, that such rights and obligations exist and are knowable only under certain conditions, that when those conditions hold FVM is not distinctive, and that when they do not hold the requirements of FVM are wishful and incoherent. Based upon this analysis, and using case study data, we explore how FVM is applied in practice to non-financial assets. We find, for a predominance of core operating assets, that fair value is unknowable, because of the absence of the institutional reality on which the FVM idea implicitly depends. In these cases, actors’ representations of fair value were found to be expedient, unstable and ultimately in direct contradiction of the market participant’s perspective that is ‘wished-for’ in IFRS.