Demystifying fair value accounting: rejoinder to Baker and Markarian

Abstract

‘Fair value’ accounting is often taken for granted. Regulators and standard setters argue that fair value norms must be implemented due to market imperatives (Bhimani 2008; Young 2003, 2006; Young and Williams 2010). Several papers argue in its defence, and others against it, without discussing its origins and societal pathways. In many countries around the world, practitioners must follow fair value practices in accordance to regulations and standards issued by the IASB and FASB. However, although the historical origins of fair value should have been settled by now, they have not been settled yet. Our study (Cardao-Pito and Ferreira 2018) contributes to demystifying fair value accounting. We have shown that a parallelism exists between contemporary fair value accounting norms and Irving Fisher’s theoretical writings from more than a century ago (Fisher 1906, 1907). Moreover, we have demonstrated that fair value accounting is based upon a specific theory, not the demonstrated truth – a theory that is also highly influential in economics and related disciplines (Cardao-Pito 2016, 2017; Dimand and Geanakoplos 2005; Friedman 1994, 37; Markarian 2018; Tobin 1987, 2005). Thus, we wish to challenge the strange sense of academic, normative and practical authority that this fragile theory currently seems to have. It is by explaining its origins, concepts and foundations that we can expose this theory to the standard of scientific inquiry regularly faced by other theories. We are very grateful to Markarian (2018) and Baker (2018) who have served as referees to our study that has benefitted immensely from their learned advice. Likewise, we are very grateful to Cheryl McWatters, the editor, for allowing this important discussion to continue within the pages of Accounting History Review. Both Markarian and Baker find our study to be interesting, recognise the seriousness of our scholarship, and acknowledge the empirical connection between fair value and Fisher’s writings as identified. Thus, we have attained the key aims of our research, which pleases us very much. The Fisherian framework, fair value accounting and economics must not be taken for granted. Accounting has a very important role in organising our societal life and practice. We must not allow relevant theories to be under-researched or under-tested. Nonetheless, Baker (2018) and Markarian (2018) have some divergent opinions with respect to our conclusions, and significant differences between their respective arguments. Could we step aside, and allow them to exchange ideas and arguments, their conversation could bring important contributions not just to the accounting literature, but to economics, business, organisation and finance as well. The wealth of research questions that they raise can only be tackled eventually in future research. Besides some smaller divergences, Baker (2018) agrees with us in many respects. We highlight, for instance, our criticism about fair value accounting and our proposition that Fisher’s theoretical framework is normative, given that it advocates how economics and accounting should be (196). However, he has a fundamental divergence with our work. He raises the possibility that the link between Fisher’s writing and fair value norms might just be a coincidence (192), or an anomaly (198). We welcome this position as an advancement. During several years, many researchers have denied or ignored the relevance of Fisher to accounting literature