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

Description
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.

Representing the market perspective: Fair value measurement
for non-?nancial assets
Richard Barker
a,?
, Sebastian Schulte
b
a
Saïd Business School, Oxford University, United Kingdom
b
Judge Business School, Cambridge University, United Kingdom
a b s t r a c t
Fair value measurement (FVM) in IFRS calls for a market-oriented representation of eco-
nomic ‘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 institu-
tional 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-?nancial
assets. We ?nd, 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.
Ó 2015 Published by Elsevier Ltd.
Introduction
At the heart of the method of ?nancial accounting is the
balance sheet, which is a representation of economic ‘real-
ity’, in the form of a summary of the rights (assets) and
obligations (liabilities) of a reporting entity. That represen-
tation, undertaken in accordance with prevailing account-
ing standards, can be viewed as a process of translating
activities and events into ?nancial metrics (Robson,
1991) and, thereby, as a mechanism for enabling economic
discourse with respect to those activities and events
(Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1980;
Hopwood, 1987). The accounting process is not neutral in
this regard, however, and what counts as an accounting
representation changes over time (Burchell, Hopwood, &
Clubb, 1985; Davis, Menon, & Morgan, 1982; Hines,
1988; Miller, 1998). The map-making metaphor proposed
by standard-setters themselves is therefore rejected by
Hines (1991), while Young (1994) describes accounting
problems as being constructed as opposed to simply ‘being
there,’ and Young and Williams (2010) identify the value
judgements that are unavoidably implicit in identifying
and classifying amounts required to be recognised in the
?nancial statements.
Instead of accounting representations being neutral,
Davis et al. (1982) and Morgan (1988) view them instead
as partial, being determined by reference to the de?ning
attributes of a chosen metaphor. So, for example, represen-
tation according to an ‘accounting as history’ metaphor is
concerned with ‘providing a faithful record of the transac-
tions of an enterprise’ (Morgan, 1988). The image of
accounting here is one of serving the function of social
memory (Basu, Kirk, & Waymire, 2009) and of providing
an account of the stewardship of resources (Ijiri, 1983;
Murphy, O’Connell, & O’hOgartaigh, 2013). This leads to
an emphasis being placed on information that is perceivedhttp://dx.doi.org/10.1016/j.aos.2014.12.004
0361-3682/Ó 2015 Published by Elsevier Ltd.
?
Corresponding author.
Accounting, Organizations and Society xxx (2015) xxx–xxx
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
to be reliable and veri?able, that can be ‘counted on’ to
underpin consensus in preparation and use (Ijiri &
Jaedicke, 1966). These are informational characteristics
typically associated with historical cost accounting (Ijiri,
1983). An alternative metaphor, also proposed by Morgan
(1988), is ‘accounting as economics’, which is ‘the view
that accounting should try to mirror current economic
realities and re?ect basic economic principles.’ While the
development of economic thought can be said to have
itself built upon a metaphor of accounting practice
(Klamer & McCloskey, 1992), ‘accounting as economics’
reverses that causation. The image here is one of economic
theory guiding accounting practice, with accounting infor-
mation seeking to capture current market prices and to
inform current, economic decision-making. Varying in
emphasis, for example from seeking to determine pro?t
as a measure of economic performance (e.g. Edwards &
Bell, 1961; Sterling, 1970) to simply viewing accounting
information as an input into investment decision-making
(Beaver, 1989), a common theme here, in contrast with
‘accounting as history’, is an appeal to the underlying dis-
cipline of economics, and so to the importance of market
signals and expected cash ?ows in the determination of
accounting practice.
In this paper, we interpret the introduction of fair value
measurement (FVM) in IFRS as a shift in metaphorical con-
struct, from the historical to the economic, and so also as a
shift in the accounting representation of economic ‘reality’.
Our aim is to explore the nature of this change, and to
make a research contribution that is both theoretical and
empirical.
The paper is structured as follows. In Section ‘Account-
ing as economics: the fair value idea’, we position fair value
in IFRS 13 as a transforming idea, as an extension in
accounting of an underlying logic of ?nancial economics,
which introduces a concept of ‘the market’ to replace a
more traditional, transaction-based perspective of
accountability and stewardship (Morgan, 1988; Power,
2010; Ravenscroft & Williams, 2009). Explicitly shifting
the emphasis in accounting practice, from what the IASB
terms the ‘reliable’ measurement of carrying amounts in
the balance sheet, to the IASB’s more recent conception
of the ‘faithful representation’ of what the current values
of assets might hypothetically be, FVM points towards
change in the accounting representation of economic ‘real-
ity’. This idea of fair value in IFRS 13 contains several impli-
cit assumptions, both about the ontological nature of the
‘reality’ that is being represented in accounting, and also
about epistemological claims that can be made with
respect to that ‘reality’. In Section ‘Searle’s analysis of the
nature of institutional reality’ we draw upon Searle’s anal-
ysis of social reality (Searle, 1995, 2010), in order to pro-
vide a theoretical basis from which these implicit
assumptions in IFRS 13 can be made explicit, and thereby
better understood. Of central importance here is Searle’s
notion of an ‘institutional fact’, which is something that
can be known objectively about an institution. In turn,
and as will be explored in greater depth in Section ‘Searle’s
analysis of the nature of institutional reality’, an institution
in Searle’s analysis is an agreed-upon means for creating
rights and obligations among agents (Searle, 2005).
Financial reporting, being concerned with economic rights
and obligations, can therefore be seen as a system for rep-
resenting institutional facts. This notion is applied in Sec-
tion ‘FVM and the representation of institutional facts’,
which brings together the previous two sections, applying
theory in Searle to the analysis of FVM in IFRS 13. We argue
that the process of representing fair values in ?nancial
statements does not in itself involve the creation of institu-
tional facts. Rather, the preparation of ?nancial statements
involves either the reporting of institutional facts already
in existence, or else the creation of data that cannot them-
selves constitute new institutional facts. We show that the
second of these two possibilities undermines the general-
ity of the fair value idea that is presupposed in IFRS 13,
because there exists neither an institutional reality to be
represented nor the possibility that such a reality can be
‘known’. We also show that this undermines the IASB’s
conceptual shift from the notion of ‘reliability’ to that of
‘faithful representation’, because that shift is redundant
when institutional facts are already in existence, while it
is incoherent when they do not already exist. In Sections
‘Fieldwork’ and ‘Case study evidence’, we turn to the
empirical components of our paper. Section ‘Fieldwork’
summarises our research method, which employs case
study evidence, from companies in Germany, Switzerland
and the UK, to explore how FVM is interpreted and applied
in practice. Section ‘Case study evidence’ then sets out the
case study evidence fromour ?eldwork. We ?nd that, faced
with the conundrum that there is an absence of institu-
tional facts, yet also a requirement to implement IFRS 13,
preparers of ?nancial accounts sought to represent fair
value in one or more of the following ways: transferring
the problem elsewhere, narrowing the problem to make
it more tractable, or ?nding an expedient solution by sub-
verting the requirements of IFRS 13. We suggest that these
practices led to a varied and inherently unstable account-
ing representation of fair value, at odds with the fair value
idea that is wished-for in IFRS 13. In Section ‘Conclusion’
we bring together theory and evidence, drawing out and
discussing the main ?ndings and implications of our
research.
Accounting as economics: the fair value idea
Fair value has emerged in recent years as the preferred
measurement model of the IASB. As described by a former
IASB board member, ‘fair value meets the conceptual
framework criteria better than other measurement bases
considered’ (Barth, 2007). Along similar lines, another for-
mer board member concluded that ‘fair value is here to
stay ... conceptual support for fair value is demonstrable’
(McGregor, 2007). Fair value has duly appeared in account-
ing standards introduced by the IASB, such as IFRS 2, IFRS 3
and IFRS 9, as well as in revisions to earlier standards, such
as IAS 16 and IAS 36 (IASB, 2013), and most recently in pro-
posed revisions to the IASB’s Conceptual Framework.
1
1
It should be noted that the incorporation of fair value in proposed
revisions to the IASB’s Conceptual Framework is in the context of a mixed
measurement model, as opposed to a ‘full fair value’ approach.
2 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
While the 2008 credit crisis somewhat tarnished the status
of FVM, any serious alternative to fair value in IFRS has been
conspicuous by its absence. Indeed, IFRS 13 is unique in
being the only of?cial IASB pronouncement with the explicit
purpose of setting out a theory and practice of
measurement.
There are two respects in which the adoption of FVM
implies a transition from ‘accounting as history’ to
‘accounting as economics’. First, in contrast with a more
traditional, transaction-based perspective, FVMis explicitly
market-oriented, whereby the perspective of the market is
proposed as the foundation for accounting representation.
Second, IFRS 13 insists on the generality of a market per-
spective, whereby the objective to report market values
holds whether or not markets themselves exist, which
leads to what Power (2010) terms a ‘transformation of reli-
ability’. In this section of the paper, we set out and discuss
these two de?ning aspects of the fair value idea.
At the heart of IFRS 13 is a distinctive concept of ‘the
market’. This is consistent with the ‘accounting as econom-
ics’ metaphor, with its emphasis on current market prices
as a guide to economic decision-making. The centrality of
the market concept is indicated in the stated objective of
FVM in IFRS 13, which is ‘to estimate the price at which
an orderly transaction to sell the asset or to transfer the lia-
bility would take place between market participants at the
measurement date under current market conditions’ (para
2; italics in the original). Implicit in the characterisation of
value as ‘fair’ is that it represents the outcome of an arm’s
length agreed exchange, of an ‘orderly transaction ...
between market participants ... under current market
conditions.’
In the following extract from its conceptual framework,
the FASB summarises the ideological appeal of this market
orientation (FASB, 2000, para. 26):
2
Among their many functions, markets are systems that
transmit information in the form of prices. Marketplace
participants attribute prices to assets and, in doing so, dis-
tinguish the risks and rewards of one asset from those of
another ... An observed market price encompasses the con-
sensus view of all marketplace participants about an asset
or liability’s utility, future cash ?ows, the uncertainties sur-
rounding those cash ?ows, and the amount that market-
place participants demand for bearing those uncertainties.
This is an abstract, instinctive appeal, inspired not least
by Hayek, to the informational system of ‘the market’ as
the desired basis for accounting representation (Hayek,
1945; Slater & Tonkiss, 2001, chap. 2). The cultural author-
ity of ?nancial economics comes through loud and clear, in
the form of an endorsement of, ?rst, the claimed superior-
ity of ‘the market’ as the revealer of economic preferences
and, second, the ‘textbook’ characterisation of the valua-
tion methods that underpin market-oriented calculative
practice (Power, 2010; Whitley, 1986).
An implication of this economic logic is that there is no
distinction in IFRS 13 between different ‘types’ of fair
value, but instead a single, unifying measurement objec-
tive. Stated differently, the concept of an equilibrium, mar-
ket-clearing price is an inexorable and unique outcome of
economic logic; no alternative ontology is conceptually
permissible. In this paper, we call this the ‘market ontol-
ogy’. The market-orientation in IFRS 13 is therefore not
partial but is instead pervasive and general. Yet this con-
ceptual positioning raises a practical question, namely
how should fair value be determined in cases where mar-
ket prices are not readily available? It is in the answer to
this question that IFRS 13 introduces the second aspect
of the idea of FVM, namely the insistence on generality.
IFRS 13 explicitly acknowledges that different types of
data are available for the purposes of an accounting repre-
sentation of fair value. In other words, while (in the sense
described above) there is a single ontology – the market
ontology as a universal concept of fair value – there is also
acknowledgement of epistemological diversity, of different
types of data with which to make epistemological claims
with respect to the representation of fair value. Speci?-
cally, ‘Level 1’ data are quoted prices in active markets,
while ‘Level 2’ data are observable inputs other than Level
1 data, and ‘Level 3’ data are unobservable, meaning that
they are the preparer’s own assumptions about ‘the
assumptions that market participants would use when
pricing the asset’ (IFRS 13, para 87).
It is particularly at Level 3 that the second aspect of the
fair value idea becomes evident. Given the IASB’s insis-
tence on the universality of FVM, even at Level 3 where
‘data are unobservable,’ IFRS 13 require preparers of ?nan-
cial statements to hypothesise the existence of markets,
such that FVM simulates the price that would exist if the
market existed (Bougen & Young, 2011; Bromwich, 2007;
Laux & Leuz, 2009; Lennard, 2007; Walton, 2007). The
‘problem’ that Level 3 falls outside the traditional, transac-
tional scope of accounting is thereby ‘solved’ by extending
the reach of accounting technique (Williams, 2002). While
there are no economic preferences revealed in actual mar-
ket transactions, accounting representation must proceed
as if there were. The novel mechanism invoked to facilitate
this move is that of the ‘market participant’. Employed rhe-
torically in much the same way as the ‘made-up user’
(Young, 2006), the market participant is the hypothetical
actor to whom IFRS 13 appeals in the determination of fair
value. IFRS 13 calls upon preparers of ?nancial statements
to assume that hypothetical market transactions are at
arm’s length, unforced and reasonably well-informed
(BC55-59), and that an asset (in its current state) is being
valued as if it had been transferred to the market partici-
pant for use in his or her own (hypothetical) business. Spe-
ci?cally, IFRS 13 states that ‘fair value measurement shall
... (be) considered from the perspective of a market partic-
ipant that holds the asset’ (para. 21), even though ‘an
entity need not identify speci?c market participants’ (para.
23) and that it ‘need not undertake exhaustive efforts to
obtain information about market participant assumptions’
(para. 89).
3
As Bougen and Young (2011) describe, there is a
2
Note that IFRS 13 was authored jointly by the IASB and the FASB.
3
Illustrative Example 1 in IFRS 13 does, however, illustrate the desir-
ability of greater information with respect to a realistic identi?cation of a
market participant.
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 3
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
sort of ‘longing’ in this requirement to represent an arm’s
length transaction between hypothetical market partici-
pants. There is the wish that an imagined reality might itself
become real, assuming the role that Baudrillard (1983)
de?nes as a ‘hyperreality’ (Macintosh, Shearer, Thornton, &
Welker, 2000). We have here an idea, which is initially born
out of economists’ theorising about revealed preferences in
markets, which is then disembodied from the function of
markets in practice and carried into the realm of hypothet-
ical markets, and which is then ?nally called upon to act per-
formatively in creating accounting representations in its
own image. Indeed, to the extent that economic theorising
is itself historically grounded in the logic and practice of
accounting, we have what Klamer and McCloskey (1992)
describe as accounting ‘eating its own tail’, where theory
abstracted from practice is taken as a guide to enacting
practice.
IFRS 13 therefore maintains an insistence on the possi-
bility of a clear distinction between the valuation perspec-
tive of the reporting entity and that of the market
participant.
4
This distinction is central, because without it
the conceptual purity of the adopted economic metaphor
could not itself be maintained. The Introduction to IFRS 13
states this position forcefully: ‘fair value is a market-based
measurement, not an entity-speci?c measurement ... an
entity uses assumptions that market participants would
use when pricing the asset ... an entity’s intention to hold
an asset ... is not relevant when measuring fair value’ (para.
IN9). We see here both aspects of the idea of FVM: it is mar-
ket-based and it can (indeed, it must) be applied universally
by means of adopting the market participant’s perspective.
Power (2010) draws attention to the ‘transformation of
reliability’ that characterises the transition being described
here from an historical, transaction-based accounting
model to an economics-based model, grounded in the
expected cash ?ows signalled by market prices. Citing
Barth (2007) and others, Power argues that ‘the very idea
of reliability is being reconstructed . . . deep down the fair
value debate seems to hinge on fundamentally different
conceptions of the basis of reliability in accounting.’ In this
respect, the transformation in IFRS 13 is consistent with a
broader re-positioning in IFRS, which is signalled by the
2010 revision to the IASB’s Conceptual Framework, in
which the IASB replaced its concept of ‘reliability’ with
an alternative concept termed ‘faithful representation’.
While these two concepts are in several respects similar
to one another, a de?ning difference is in the role played
by the notion of ’veri?cation’.
5
While both concepts carry
the representational ontology, rejected by Hines (1991), that
‘faithful representation is the depiction in ?nancial reports
of the economic phenomena they purport to represent,’ it
is only the concept of reliability that is de?ned to embody
the epistemological condition of veri?ability. Hence, when,
in 2010, the IASB introduced ‘faithful representation’ to
replace ‘reliability’, it argued that ‘including veri?ability as
an aspect of faithful representation could result in excluding
information that is not readily veri?able ... (which) would
make the ?nancial reports much less useful . . . (and so ver-
i?ability is) desirable but not necessarily required’ (IASB,
2010; BC3.36). Presumably for emphasis, the point is later
repeated: ‘faithful representation does not mean accurate
in all respects ... for example, an estimate of an unobservable
price or value cannot be determined to be accurate or inac-
curate’ IASB, 2010; QC15).
There is an important departure here between ‘account-
ing as economics’ in the fair value idea and its manifesta-
tion in earlier attempts at current value accounting,
notably Edwards and Bell (1961), Chambers (1966) and
Sterling (1970). While the ideas of fair value and of current
value share a commitment to current market prices as a
basis for ‘information-usefulness’, and while they can both
be said to differ from ‘accounting as history’ in this regard,
the current value idea does not share the readiness of the
fair value idea to downplay the importance of veri?ability.
Indeed, such an approach is rejected as antithetical to the
very purpose of accounting with, for example, Edwards
and Bell (1961) and Barton (1974) making a critical dis-
tinction between subjective cash ?ow forecasts and con?r-
matory accounting information, Chambers (1965) stressing
the discipline of measurability, and Sterling (1970) seeking
to ground accounting representation in economic opportu-
nities that are realisable as opposed to hypothetical. Fair
value therefore stands apart, as a distinctively idealistic
and subjective interpretation of the ‘accounting as eco-
nomics’ metaphor.
There are two points being made here. The ?rst is to
reinforce Power’s (2010) observation that in the revisions
to the Conceptual Framework, as in the presumed univer-
sality of fair value in IFRS 13, there is an underlying trans-
formation of the concept of ‘reliability’ in IFRS, whereby
faithful representation, or equivalently the universality of
the market ontology, is deemed to be possible even when
epistemological claims cannot be veri?ed. The second
point is that this transformation makes ontological and
epistemological assumptions, and that these need to be
unpacked in order that the nature of the transformation
can be better understood. That unpacking is the subject
of the next two sections of the paper. We will start this
process in Section ‘Searle’s analysis of the nature of institu-
tional reality’, by introducing Searle’s theory of institu-
tional reality, and in Section ‘FVM and the representation
of institutional facts’ we will then bring Searle’s theory to
apply to the discussion of FVM above. In turn, this will
lay the foundation for the empirical component of the
paper, in Sections ‘Fieldwork’ and ‘Case study evidence’.
Searle’s analysis of the nature of institutional reality
We have argued so far that IFRS 13’s introduction of
FVM implies transformation in accounting representation,
and that there is an implicit ontology and epistemology
to be understood here. In this section, we start to explore
4
Indeed, and in a move that seems to belie the (false) dichotomy
between an external ‘reality’ and an epistemologically objective represen-
tation of that ‘reality’ (Hines, 1991), IFRS 13 even allows an entity to
assume that its own use of an asset approximates that of a market
participant.
5
BC26 of the IASB’s Conceptual Framework states that ‘veri?ability
means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation’ (IASB, 2013).
4 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
this issue by setting out Searle’s theory of institutional
reality (Searle, 1995, 2010; see also Shapiro, 1997;
Mouck, 2004; McKernan, 2007, for discussion of Searle in
an accounting context). We will draw a conclusion that is
broadly similar to that in Berger and Luckmann (1966,
p78), that ‘the objectivity of the institutional world . . . is
a humanly produced, constructed objectivity.’ In contrast
with Berger and Luckmann, however, and as will be evi-
dent especially in Section ‘FVM and the representation of
institutional facts’, Searle’s theory is particularly pertinent
to this paper because it enables us to explore the philo-
sophical foundations of this institutional reality, as
opposed to being interested primarily in how our sense
of that reality is constructed (Elder-Vass, 2013).
We restrict our discussion to those basic elements of
Searle’s theory that contribute directly to the paper. These
elements, which will be described below, are: ?rst, inten-
tionality and the directions of ?t of intentional states; sec-
ond, collective intentionality and conditions of
satisfaction; third, status function declarations; and,
fourth, the ontological and epistemological status of insti-
tutional facts.
Intentionality is ‘that capacity of the mind by which it is
directed at, or about, objects and states of affairs in the
world . . . intentional states are always about, or refer to,
something’ (Searle, 2010, p25). Each intentional state is
of a given type (e.g. belief, fear, desire) and with a speci?c
content, for example the propositional content that ‘the
sun is shining.’ Different intentional states can be said to
have different directions of ?t (Searle, 2010, p27). If the
intentional state is a belief, then it is said to have a
‘mind-to-world direction of ?t’, meaning that the belief
can be said to be true or false: either the sun is shining,
or it is not, hence the condition of satisfaction of the inten-
tional state is whether the sun actually is shining. If the
intentional state is a desire, then it is said to have a
‘world-to-mind direction of ?t’, meaning that the desire
can be either satis?ed or frustrated: either the sun will
come out and satisfy the desire, or it will not, hence the
condition of satisfaction of the intentional state is whether
or not the sun will come out.
6
Central to Searle’s interpretation of the social is the
notion of collective intentionality, which is a precondition
of cooperative behaviour, whereby the intentional state
of an individual is shared with those of other members of
a group. Collective intentionality can be surfaced by asking
the question ‘what exactly is the collective trying to do?’
(Searle, 2010, p55). An example in Searle (1990) is that of
a group of people sitting outside, who each individually
run for shelter when it starts to rain. He contrasts this with
the same group performing the same actions, except this
time in the context of acting out a scene in a play where
the actors run for shelter. In the former case, there is inten-
tionality for each individual in the form ‘‘I intend to do x’’
while, in the latter case, there is a collective intention in
the form ‘‘we intend to do y.’’ There is likewise collective
intentionality in playing team sports, because the partici-
pants are consciously engaged in social behaviour, where
what ‘‘I’’ am doing is a part of what ‘‘we’’ are doing.
What the collective is trying to do is a question of cau-
sality, of a social outcome that the collective is seeking to
bring about. Searle gives the example of a line of stones
on the ground, which interested parties agree de?nes a
boundary between properties. What is happening is that
the stones are assigned the function of being a boundary,
which causes it to be so, even though this function is obser-
ver-relative and is not an intrinsic property of the stones
themselves. This function is created by virtue of collective
intentionality and sustained by means of collective recog-
nition: the stones act as a boundary because, and only
because, all parties agree that this is the case. The mecha-
nism is that functions are created by speech acts that are
constitutive rules, which make something the case by rep-
resenting it as being the case. Searle terms these speech
acts ‘status function declarations’, which take the logical
form ‘X (object) counts as Y (function) in C (context).’
Hence, on the basis of collective intentionality with respect
to the stones, the statement ‘we declare that these stones
(X, object) count as a boundary (Y, function) in the rela-
tionships among interested parties (C, context)’ is constitu-
tive of the institutional reality that a boundary has been
created, the subsequent existence of which depends
entirely on its collective recognition. Likewise, pieces of
paper function as bank notes (or money) because we
intend them to do so, and the mechanism is that collective
intentionality confers a function on the piece of paper that
creates a newinstitutional reality. In general, an institution
is a system of constitutive rules, and such a system auto-
matically creates the possibility of institutional facts. In
this way, Searle (2010, p13) argues that ‘all human institu-
tional reality is created and maintained in existence by sta-
tus function declarations.’
Four important points should be noted here. First is that
the creation and maintenance of institutional facts
requires collective intentionality, status function declara-
tions and collective acceptance; institutional facts do not
otherwise exist. Second is that functions in general serve
a purpose, and that, in the case of status function declara-
tions, the primary purpose is to create and regulate power
relationships, for example rights and obligations with
respect to a property boundary, a monetary amount or a
contract. The reason for the constitutive rule that creates
the boundary is to determine and regulate the power rela-
tionships among interested parties; otherwise, the func-
tion would serve no purpose. Searle uses the term
‘deontic power’ in this context, where rights and obliga-
tions are, respectively, positive and negative deontic pow-
ers. The third point to note is that status function
declarations need not be bestowed upon objects, as for
example stones in the example above. They can instead
be created ‘out of thin air’, adopting what Smith (2003)
terms ‘freestanding Y terms.’ An example here is electronic
money, where a status function is assigned, and collec-
tively recognised, without being bestowed on any object.
Yet Searle notes that ‘the freestanding Y terms always bot-
tom out in actual human beings who have the powers in
6
It might be noted that there is a certain ontology being assumed in
these examples, namely that ontologically objective existence is possible.
As will later be described, however, Searle’s analysis is consistent with
viewing all forms of accounting as having an ontologically subjective mode
of existence.
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 5
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
question because they are represented as having them ...
you don’t need to have a physical realisation to have
money or a corporation ... but you do have to have owners
of money and of?cers and shareholders of a corporation’
(Searle, 2010, 108–9). Finally, the fourth point to note is
that while all institutional reality created by means of sta-
tus function declarations is ontologically subjective,
because it does not exist independently of people, this does
not preclude the possibility that it is epistemologically
objective, and thereby permits observer-independent
ascertainment of truth or falsity. While money is an insti-
tution, and not an intrinsic property of pieces of paper, it is
epistemologically objective (an institutional fact) that, for
example, the closing share price of Pearson plc on 17 Feb-
ruary 2014 was £11.17. In short, we can make epistemo-
logically objective claims with respect to ontologically
subjective social realities.
In brief summary, Searle’s account of institutional reality
requires that collective intentionalityis enactedbymeans of
status function declarations, enabled by collective inten-
tionality and maintained by collective acceptance, which
create (ontologically subjective) institutions and thereby
(epistemologically objective) institutional facts.
FVM and the representation of institutional facts
Applying Searle’s theory, we can now start to explore
the ontological and epistemological foundations of FVM.
We ?rst note that, in general, accounting represents an
economic ‘reality’ that does not exist independently of
human experience. For example, while something such
as oil can be said to have an ontologically objective exis-
tence, it is only by social consensus that it can be said to
exist as an ‘asset’ with an attribute such as ‘market
value’; the oil price that we record in the accounts is
therefore ontologically subjective. So, too, all accounting
representations are ontologically subjective, whether
assets, liabilities or equity, because they do not exist
independently of human experience. As Searle argues,
however, ontological subjectivity is not inconsistent with
epistemological objectivity. For example, while the exis-
tence of an equity claim depends subjectively upon
human experience, the share price at which the claim
trades at any speci?c point in time is an institutional fact
that can be known.
What, then, of fair value? Consider ?rst Level 1, which
is de?ned in terms of observable market prices, and
which therefore invites us to re?ect upon the social and
institutional reality of existing markets. In the context
of IFRS 13, while the general, conceptual appeal to ‘the
market’ is itself detached from the materiality of markets
in practice, any accounting representation that uses Level
1 data to enact IFRS 13 must relate to the complexities of
a practical setting. To illustrate, Callon (1998), MacKenzie
(2009) and others argue that, for market transactions to
be possible in practice, and so for markets to exist, there
is a need for ‘framing’. This requires that items being
traded are capable of ‘disentanglement’, whereby trans-
fers of property rights between calculative agents require
(?nancial) measurability, separability and so transferabil-
ity. In turn, this depends upon the existence of a legal or
regulatory framework, standards of conduct and calcula-
tion, and some form of physical structure or process that
constitutes the marketplace itself. Roberts and Jones
(2009), Vollmer, Mennicken, and Preda (2009) and others
emphasise the nature of the market as a network,
whereby market transactions and the environmental con-
texts for those transactions are co-determined. In short,
we have here a complex, subjective social ontology. Yet
Searle’s analysis suggests that we also have a product of
this network that is a simple, epistemologically objective,
institutional fact which (like money) conveys a deontol-
ogy of economic rights and obligations; namely, the mar-
ket price. This institutional ‘facticity’ is important from an
accounting perspective, because an accounting represen-
tation using Level I data can be viewed simply as a
recording of an institutional fact, as a ‘mapping’ from a
price recorded in the market to the same price reported
in the ?nancial statements. While such a mapping may
require the IASB to act as a regulative rule-maker, indicat-
ing how the fair values should be presented in the ?nan-
cial statements, there is no constitutive rule here that
would create a new institutional reality, other than in
the trivial sense that ‘the observed market price (X)
counts as the fair value (Y) in the context of ?nancial
reporting (C).’ To borrow the language of intentionality,
there is a mind-to-world direction of ?t, where the IASB’s
concept of veri?ability is the mechanism by which the
reported institutional fact can be said to be true or false.
Moreover, there is no practical difference in this case
between the concept of ‘reliability’ and that of ‘faithful
representation’. This is because it is the market partici-
pant’s perspective itself that is being veri?ed, such that
establishing ‘reliability’ in the IASB’s sense of the term
implies making an epistemologically objective claim to
the market ontology, which has the same meaning as
the IASB’s concept of ‘faithful representation’.
This position stands in sharp contrast with Level 3 fair
values, where there is nothing to be observed and there-
fore epistemological subjectivity in the making-up of a
market participant’s perspective. While, at Level I, there
is collective intentionality among market participants (of
the form ‘we are trading on a market’), as well as a status
function declaration with respect to market prices (of the
form ‘market prices count as economic claims’), at Level
3 there cannot in principle be either collective intentional-
ity or status function declaration, because market partici-
pants do not exist. In the sense described by Searle,
therefore, institutional facts do not exist at Level 3, and
so they cannot be reported.
An implication of this absence of institutional facts is
that there is logical incoherence in the market ontology
maintained in IFRS 13 and, more generally, in the IASB’s
notion of ‘faithful representation’. This is because the exis-
tence of institutional facts simultaneously implies a subjec-
tive social ontology and an objective epistemological claim
with respect to that ontology: there exists something to be
known, as well as an objective claim that it is known. At
Level 3, however, IFRS 13 requires that the individual pre-
parer of accounts represents a hypothetical ontology. In
contrast with Level I, this ontology has a world-to-mind
6 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
direction of ?t. It cannot in principle be ‘known’ but is
instead a ‘wished-for’ social outcome, whereby the pre-
parer is required to adopt the perspective of the market
participant in a neoclassical economic world of the IASB’s
imagination. Hence, the market ontology at Level 3 is not
observable as a social outcome, in the manner of market
prices at Level 1, but instead it is inaccessible to the pre-
parer and does not permit the making of an epistemologi-
cally objective claim. Alternatively stated, the absence of
veri?ability (and so reliability) arises jointly with the
absence of the possibility of faithful representation, for
the simple reason that there is no institutional fact to be
represented in the ?rst place. The ontological status of
FVM at Level 3 is therefore fundamentally different from
that at Level 1. While both are ontologically subjective,
the epistemological objectivity at Level I is consistent with
the single ‘market ontology’ described above, while the
epistemological subjectivity at Level 3 renders implausible
the preparer’s ability to represent this single ontology,
thereby rendering empty any claim to faithful representa-
tion. Moreover, while the concept of faithful representa-
tion is meaningful in the presence of institutional facts at
Level I, it is also in this context redundant because if the
institutional facts have been veri?ed, then they are neces-
sarily representationally faithful. In short, the IASB’s notion
of ‘faithful representation’ is meaningless at Level 3 and
redundant at Level 1.
Overall, we have neither a fully representational nor a
fully constructionist view of accounting, but instead a
hybrid of the two. In contrast with Hines (1988), commu-
nication does not construct reality at Level 1, but instead
an existing institutional reality is reported. At Level 3,
there is a form of reality construction in that fair values
are imagined and reported in a way that does not corre-
spond with an existing institutional reality. Yet, in Searle’s
sense, we do not have the creation of new institutional
facts in this case either, because there is no collective
intentionality in generating these fair values. This is not
to deny that the subsequent usage of these reported data
might not itself lead to the creation of new institutional
facts. This is possible because reported fair values are
observable and can form a basis for collective agreement
and action. We are, however, making a distinction here,
which is otherwise con?ated in the literature, between
the accounting representation itself and the subsequent
(social) use of accounting representations, and we are
arguing that the accounting representation itself does not
create new institutional facts, either at Level 1 or at Level
3. Accounting data are ?rst produced and then they are
used; the former process – the accounting representation
itself – does not lead to the creation of institutional facts.
In the empirical sections of our paper, to which we now
turn, we present evidence concerning how the accounting
representation itself is made. We have argued that IFRS 13
presupposes a market ontology that cannot in principle be
a general basis for accounting representation. Yet the
implementation of IFRS 13 by companies is nevertheless
not optional. Our evidence therefore concerns how prepar-
ers of accounts enact the (unrealistic) market ontology of
IFRS 13 in making accounting representations of fair value.
Fieldwork
Our ?eldwork was designed to explore the implementa-
tion in practice of IFRS 13, in particular in what ways the
representation of fair value constitutes either the reporting
of pre-existing institutional facts or the ‘making-up’ of a
market perspective and, if the latter, what characterises
the process of accounting in the absence of the creation
of new institutional facts.
We adopt a case study-based research design, investi-
gating the fair value determination practice of publicly
listed companies in the pharmaceutical (P), electricity util-
ity (E), telecom (T) and general industrial (I) sectors, in
Germany, Switzerland and the UK, all of which applied
IFRS as primary accounting standards. We employ the case
study method (Cooper & Morgan, 2008) in seeking to go
beyond the abstraction and assumption of the ‘accounting
as economics’ metaphor adopted in IFRS 13, and to explore
the enactment in practice of IFRS 13’s distinctive approach
to ‘the market’ as the basis of accounting representation.
7
Given the open-ended and exploratory nature of our study,
we sought to select case studies based upon an informa-
tion-oriented selection. In contrast with a random selection,
which aims to avoid systematic bias in the sample, an infor-
mation-oriented selection acknowledges that a typical or
average case is often not the richest in information
(Flyvbjerg, 2006) and cases are instead selected on the basis
of expectations about their information content (Eisenhardt,
1989; Ragin & Becker, 1992; Roesch, 1978), including
extreme cases in which the process of interest is ‘transpar-
ently observable’ (Pettigrew, 1995).
In seeking this richness of information, our selection of
case studies rested upon potential variety, scope and chal-
lenge of FVM application in case settings. We took com-
pany size as a proxy for complexity and diversity, with
larger companies being potentially more diverse by busi-
ness and geography. Speci?cally, we aimed to select listed
companies that were the constituents of the national main
stock index, namely the DAX30 in Germany, the SMI25 in
Switzerland and the FTSE100 in the UK. Our choice of
countries increased the richness of information by drawing
upon different accounting traditions (Nobes, 1983).
8
We
7
Given the importance of FVM, there is surprisingly little empirical
research that is directly relevant to this paper. Most research addressing
FVM adopts a market-based, ‘archival-empirical’ methodology (Landsman,
2007), which has a ‘black box’ character which bypasses the main themes of
this paper. While this suggests an important role for alternative research
methods, such studies are few and far between. An experimental method is
employed in Gaynor, McDaniel, and Yohn (2011) to evaluate users’
understanding of credit risk changes, for liabilities carried at fair value.
Gwilliam and Jackson (2008) employed a case study approach to explore
the manner in which Enron arrived at fair values, including identi?cation of
the ease with which the company used special purpose entities to
‘monetize’ physical assets and so to achieve fair value accounting. The
informational richness of the case study approach is further illustrated by
Benston (2006), who analysed the escalating use of fair values by Enron,
identifying the sources of the escalation, the process by which (in
particular) Level 3 fair values came increasingly to be used, and the
consequences for the ?nancial health of the company.
8
Barrett, Cooper, and Jamal (2005) ?nd variation even in standardised
audit procedures conducted by multi-national audit ?rms, and such
variation might be expected to even more pronounced across reporting
entities from different geographical and cultural settings.
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 7
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
also looked for diversity across industries and for complex,
economically signi?cant non-?nancial assets within indus-
tries. We excluded ?nancial assets in part to avoid scoping
the ?eldwork too broadly, but primarily because of the
information-oriented selection described above, according
to which we expected non-?nancial assets to provide rich
and diverse data, as the applicability of FVM can be viewed,
a priori, as challenging, given a likely absence of markets,
inseparability of assets and value generated by assets in
use rather than in exchange. For pharmaceuticals, while pro-
duction is not a capital-intensive process, the centrality of
intellectual capital generates complex and unique intangible
assets such as patents, licences and other subclasses of long-
lived intangible assets. For electricity utility companies,
specialised assets are employed across a range of oil, natural
gas, coal, nuclear power, hydro power, renewable fuel, wind
turbine and photovoltaic technologies, with additional com-
plexity resulting from the interaction between different
assets in a network and because of the effects of regulatory
control. Telecom companies also exhibit complex asset
interactions and regulatory processes, while also combining
substantial tangible assets, in the form of telecom networks,
with intangible assets, notably wireless licences and con-
sumer-oriented brands. Finally, the general industrials sec-
tor was considered to offer ‘textbook’ examples of capital-
intensive business, with property, plant and equipment
likely to be specialised in nature.
A selection frame was created by using the ‘Industry
Classi?cation Benchmark’ (ICB), which comprised 28 phar-
maceutical, 31 electricity utility, 18 telecom and 106
industrial companies in Germany, Switzerland and the
UK.
9
While the recruitment of participants proved to be
challenging, we were successful in gaining access to eleven
companies, one short of our target but including several
large, global companies.
10
As reported in Table 1, which pro-
vides a summary of case study participants, the market cap-
italisation and turnover of P1, P3, E2, T1, T2, and I2 are all in
the top 5 amongst their Western-European peers. They are
joined by T3 and E3 as being in the top 3 national peer
group.
The core parts of the case studies were semi-structured
interviews, which enabled a detailed investigation of com-
plex, entity-speci?c and asset-speci?c issues. The inter-
view questions were adapted from case to case to
account for the varying structural, national and regulatory
settings of the case companies and, in order to increase
contextual understanding, a considerable amount of addi-
tional data and sources were also used in each case, such
as annual accounts, 20-F forms, interim reports, manage-
ment reports (also of main competitors) and publicly avail-
able documents or presentations dealing with the
implementation or adoption of IFRS. We sought input only
from senior members of the group ?nancial reporting
department, and only in very large companies where there
was resource dedicated to high-level technical accounting
expertise. This need for depth of knowledge and experi-
ence of FVM among interviewees arose simply to ensure,
as far as possible, high-quality, well-informed evidence.
Interviewees were asked about their actual IFRS experi-
ence with FVM and also about the applicability of IFRS 13
in the speci?c contexts of assets in their businesses.
11
Interviews lasted from 45 min to 4 h, and were conducted
in either English or German. In all but one case, the inter-
views were conducted face-to-face, in Germany, Switzerland
or the UK, between March 2006 and February 2007. The
number of interviewees in each interview ranged from 1
to 3, and in total 19 interviewees contributed to the
research.
Case study evidence
The discussion in Section ‘FVM and the representation
on institutional facts’ concluded that fair values are either
reported as pre-existing institutional facts, or else they are
‘made-up’ representations, the preparation of which does
not involve the creation of new institutional facts. In pre-
senting our case study evidence in this section, we ?rst
highlight the importance of the second of these two cate-
gories. We found that there was typically an absence of
Level 1 data for non-?nancial assets, as well as perceived
epistemological limitations of Level 2 data with respect
to the market ontology of IFRS 13. The reporting of pre-
existing institutional facts was therefore largely precluded.
Notwithstanding these dif?culties with respect to the
absence of institutional facts, there was nevertheless a
requirement to implement IFRS 13, such that some form
of accounting representation of fair value was unavoidable.
In the second part of this section of the paper we explore
how preparers responded to this dilemma. We found that
representations of fair value were made in one or more
of the following ways: transferring the problem elsewhere,
narrowing the problem to make it more tractable, or ?nd-
ing an expedient solution by subverting the requirements
of IFRS 13.
In the ?nal part of this section of the paper, we suggest
evidence that the above practice in applying IFRS 13 led to
a varied and inherently unstable representation of eco-
nomic ‘reality’, as agents noted the subjectivity in their
own representations and considered the incentives and
interpretations of others.
An absence of institutional facts
A striking feature of the case studies was how limited in
practice were the availability of Level 1 data, especially for
9
The telecom subset comprises companies classi?ed as ICB 6535 (Fixed
Line Telecommunications) and 6575 (Mobile Telecommunications), the
pharmaceutical subset comprises companies classi?ed as ICB 4577 (Phar-
maceuticals), the industrial subset comprises companies classi?ed as ICB
2757 (Industrial Machinery), 2753 (Commercial Vehicles & Trucks), 2727
(Diversi?ed Industrials) and 2713 (Aerospace). The electricity utility subset
comprises companies classi?ed as ICB 7535 (Electricity) and 7575
(Multiutility).
10
For the 12th company, an interview was agreed upon, but then
postponed several times. Eventually, the interviewee withdrew willingness
to participate due to time constraints.
11
IFRS 13 was preceded by an Exposure Draft and a Discussion Paper. As
IFRS 13 is the current document, and as it does not differ signi?cantly from
the earlier documents, it is IFRS 13 that is referred to in this paper. At the
time of the interviews, however, the current document was the DP (and,
under US GAAP, SFAS 157).
8 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
the core assets of the case companies; the simple case of
representing fair values by reporting pre-existing institu-
tional facts was largely irrelevant. This arose is part
because the cash-generating capacity of individual assets
often could not be separated from that of the business as
a whole, which led naturally to consideration of larger
units of account, thereby drawing away from the transac-
tional foundation of ‘accounting as history’. In the electric-
ity utility business, for example, E1 claimed that the core
assets were ‘one big and inseparable unit,’ while a telecom
interviewee noted that ‘the end customer normally does
not realise whether he is currently using a 3G or a 2G fre-
quency band, nor does he pay a different price’ (T3), imply-
ing that a market-based perspective did not permit cash
?ows to be attributed to separable assets.
At the level of individual assets, also, it was widely
claimed that Level 1 data were unavailable. There were
some limited exceptions, yet these commonly applied (in
impairment tests and purchase allocations) only for assets
that represented a modest component of the balance sheet,
such as cars, trucks and buildings. More generally, the nat-
ure of core assets for many of the companies precluded the
existence of observable market prices. An illustration,
offered by P3, was that the company had never been
approached by a competitor offering to buy one of its key
brands, which were described as ‘unique by their very nat-
ure;’ in contrast, ‘dossiers’ for off-patent (generic) drugs,
covering all product characteristics and aspects of manu-
facturing, were frequently traded, yet at values not reach-
ing the materiality threshold in P3’s ?nancial statements.
The uniqueness of core non-?nancial assets also applied
for the most part to the ?xed and mobile telephony net-
work assets in the telecom group of case study companies,
the production, transmission and distribution system in
the electricity utility group and, to a certain extent, the
production plants and facilities of the industrial case com-
panies. The absence of market prices was therefore a sig-
ni?cant challenge, not a marginal one. There was nothing
like the continuous trading associated with an active mar-
ket. As one interviewee described:
‘There is neither a market for nuclear power plants nor for
our regional electricity transmission lines ... We own huge
infrastructure assets which simply never change hands at
all ... in terms of Level 1, there is no data at all, nothing.’
[E1]
The dif?culties described here were not restricted to the
absence of Level 1 data. They were also evident in the con-
text of Level 2 data, where the problem was not so much
that data were unavailable, but rather that (in substance)
case study participants challenged their epistemological
status with respect to IFRS 13’s market ontology. An exam-
ple was provided by T2 which, for the purposes of an
annual goodwill impairment test, had been sought to
determine the fair value of a major operation in a foreign
country. Unlike in previous years, the past year had yielded
Level 2 data, in the form of the price offered in a takeover
bid by a global competitor of another company in the
industry. The interviewees struggled, however, to make
use of this market information, the main reason being
the perceived incomparability between their own opera-
tion and the competitor’s operation. In particular, the size
Table 1
Case study participants.
Market capitalisation
a
Turnover
a
IFRS US-GAAP
Panel A: company size and accounting standards
T1 Top 5 Top 5 Yes Yes
b
T2 Top 5 Top 5 Yes Yes
b,c
T3 Top 10 Top 10 Yes Yes
b
P1 Top 5 Top 5 Yes Yes
b
P2 Top 20 Top 10 Yes No
P3 Top 5 Top 5 Yes Yes
c
I1 Top 10 Top 10 Yes No
I2 Top 5 Top 5 Yes No
I3 Top 30 Top 50 Yes No
E1 Top 20 Top 20 Yes Yes
E2 Top 5 Top 5 Yes Yes
b,c
E3 Top 50 Top 30 Yes Yes
Intangibles Goodwill Land and buildings Plant and equipment
Panel B: composition of long-lived, non-?nancial assets (% of total asset value)
Telecom 3.6–28.5 2.2–26.7 2.9–7.8 25.3–56.0
Avg. 12.2 Avg. 15.0 Avg. 5.3 Avg. 36.9
Pharmaceutical 2.6–15.5 3.0–15.7 7.1–10.9 9.0–11.6
Avg. 10.3 Avg. 9.7 Avg. 8.9 Avg. 10.4
General industrial 4.0–7.0 7.1–12.7 4.4–14.7 8.3–48.7
Avg. 4.4 Avg. 10.3 Avg. 10.0 Avg. 22.2
Electricity utility 0.9–4.3 1.7–11.8 1.7–4.2 17.9–28.9
Avg. 2.7 Avg. 5.6 Avg. 3.3 Avg. 23.1
T = telecom; P = pharmaceutical; I = general industrial; E = electricity utility.
a
In comparison with Western European peer companies.
b
Listed on the NYSE, involving reconciliation to US-GAAP and provision of SEC Form 20F.
c
Experience of change from US-GAAP to IFRS in current or previous year.
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 9
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
of both businesses, the competitive environments in both
countries, the customer behaviour and a number of other
value-affecting factors were said to differ too much. One
of the interviewees at T2 summarised as follows:
12
Let us assume we want to value our British CGU, but we
only know about a comparable transaction in Denmark;
that would not help us. There are too many differences to
warrant an adjustment approach. We cannot just say that
the Danish business is equivalent to the British one. This
would be a desperate attempt to use a mark-to-market
approach.
[T2]
A similar example arose in the case of wireless licences,
which were not regularly traded yet where a recent auc-
tion in the US (FCC-auction 66) was characterised as a
‘stroke of luck for mark-to-market FVM for non-?nancial
assets’ (T2).
13
The possibility of using the results from auc-
tion 66 to determine the fair value of the existing portfolio of
FCC-licences became heavily discussed in the telecom indus-
try. As reported in Table 2, however, alternative interpreta-
tions of the market price were possible, with four ‘of?cial’
alternatives being offered by the FCC, and these alternative
methods gave rise to signi?cant variation in prices, both at
a point in time for any given auction, and also for the rate
of price increase or decrease from one auction to another.
T2 illustrated the effects of this variation in price for a
licence acquired in the Washington DC area, for which
the range of potential fair values lay between $29.9 million
and $179 million, according to whether valuation was
undertaken at a portfolio or individual licence level,
whether adjustment was made for variation in bandwidth,
and whether or not auction revenue was weighted by the
population served by the license.
In short, these telecom examples illustrate that while
(epistemologically objective) market prices made possible
the representation of fair value based upon some sort of
market perspective, they did not make accessible the mar-
ket ontology demanded by IFRS 13, being the market par-
ticipants’ perspective speci?c to the unique assets of the
company. A similar frustration was evident in the selection
of discount rates, where market data were available in
abundance, yet where this resulted in indeterminacy,
because none of the multiplicity of alternative metrics
had any greater epistemological claim than any other. It
was stated, for example, that because Bloomberg provides
betas based on different markets, it was possible to ‘get
pretty much any value within a certain area by simply chang-
ing the parameters on the Bloomberg engine’ (T3). In addi-
tion, further subjectivity was caused by the choice of
peer companies, and several interviewees emphasised dif-
?culties in ?nding companies that operated in the same
industry, with comparable operational and ?nancial risk
structures.
Faced with this absence of institutional facts, case study
interviewees rejected the notion that ‘making-up’ the per-
spective of the hypothetical market participant was a
meaningful alternative route to the representation of fair
value. In other words, there was a rejection of the general-
ity of the market participants’ perspective, which is pre-
sumed in IFRS 13 and which was described in Section
‘Accounting as economics: the fair value idea’ as one of
the two de?ning ideas of fair value. To illustrate, P1
claimed to be unable to distinguish between the (entity
speci?c) value-in-use and the (market-based) fair value
of a brand, asserting that ‘it is impossible to create a mar-
ket where no market exists.’ Likewise, I2 explicitly ques-
tioned ‘the possibility to re?ect the perspective of a
market participant,’ while E2 saw ‘huge dif?culties in dis-
tinguishing between market and entity speci?c values.’
Such a sentiment was commonplace in the case studies.
P1 discussed at some length the conceptual possibility of
FVM’s market orientation, yet concluded with the stark
observation that ‘we simply do not know the external per-
spective.’ E1 summarised the conundrum as follows.
In theory, I could go to a third party and ask them to per-
form a valuation, but how could a third party do it, when
they are not considering buying and operating the asset
that I want to value?
[E1]
This rejection of the generality of the fair value idea is
consistent with the discussion in Section ‘FVM and the rep-
resentation on institutional facts’, where it is argued that
preparers of accounts cannot in principle ‘make-up’ insti-
tutional facts that would constitute IFRS 13’s market ontol-
ogy. In spite of this, however, the case study companies
were nevertheless faced with the practical requirement
to implement IFRS 13 and to represent fair values, notwith-
standing the inherent conceptual ambiguity underlying
that representation. Our evidence suggested that this was
undertaken in one or more of three ways: transferring
the problem elsewhere, narrowing the problem to make
it more tractable, or ?nding an expedient solution by sub-
verting the requirements of IFRS 13. These are discussed
below.
Representing fair value
One way for the case companies to represent fair value
was simply to allow another organisation to take responsi-
bility for it. For example, E2 described mandating Standard
and Poors to determine fair value purchase price alloca-
tions, for the purposes of accounting for business combina-
tions under IFRS 3. Another approach, described by P2, was
the ‘outsourcing’ of WACC calculations to Bloomberg,
which was motivated by the desire to avoid ‘endless and
useless discussions’ with the auditors. In a different con-
text, I2 described in some detail a case where it was the
auditor who decided what should count as fair value. This
case is interesting because it involved a switch from US
GAAP to IFRS, which made it possible to observe alterna-
tive accounting representations, the difference being that
discount rates were based either on average data from
three investment banks (CSFB, Citigroup and Morgan Stan-
ley) or on data from Bloomberg. As shown in Panel A in
Table 3, the unlevered betas of six competitors was aver-
12
A CGU is a cash-generating unit.
13
The FCC is the Federal Communications Commission, which regulates
the US telecom industry.
10 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
aged over three annual periods, and the resulting beta of
1.15 was adjusted to the actual debt-to-equity ratio of
the particular CGU and used for determining all FVMs in
the operating segment in question. Panel B in Table 3 pro-
vides a side-by-side comparison of the betas according to
the two different methods for all ?fteen of the company’s
operating segments. The differences are signi?cant, with
Bloomberg betas being substantially larger. Panel C, which
concerns the application of FVM to a CGU, and which was
discussed in the interview, illustrates that the effects of
these differences amounted to an increase of signi?cantly
greater than 100% in the goodwill buffer.
While both sets of parameters were market-based and
could therefore claim to represent the market
participant’s perspective, it was the auditor that ‘negated
suddenly’ the selection of one method over the other,
thereby arbitrarily determining which accounting repre-
sentation of fair value would be made. This arbitrariness
was evident also in the interview with P2, where it was
argued that: ‘To speak quite frankly, when auditing a com-
plex fair value, no auditor can prove that a 5% revenue
growth rate is incorrect nor can they say it has to be 4.5 or
5.5% ... we are able to in?uence the result dramatically just
by minimally changing one of the more important, and less
Table 2
Estimates of historical prices in US wireless telecom licence auctions.
FCC auction
(prices in $
p.c.)
Pricing method 1 Pricing method 2 Pricing method 3 Pricing method 4
Price equals: Total auction
revenue divided by total
auction population
Price equals: The average of revenue per
licence divided by population of
respective licence area
Price equals: As method
one, adjusted for licence
bandwidth
Price equals: As method
two, adjusted for licence
bandwidth
Auction 4 15.54 13.23 0.52 0.44
Auction 5 39.88 23.33 1.33 0.78
Auction 10 58.28 46.64 1.94 1.55
Auction 35 42.37 20.25 4.03 1.96
Auction 58 9.89 4.62 0.96 0.46
Auction 66 7.99 3.25 0.43 0.18
Table 3
Illustrative example of subjective selection of discount rates.
Company Country Year Average
1/05–1/06 1/04–1/05 1/03–1/04
Panel A: peer group-based calculation of b
Arcelor Canada 1.05 0.95 0.67 0.89
Corus Group UK 1.72 1.50 n.a. 1.61
Rautaruukki Finland 1.60 0.45 0.31 0.79
Salzgitter Germany 0.82 0.34 n.a. 0.58
SSAB Sweden 1.03 0.71 0.53 0.76
US Steel USA 2.92 2.78 1.18 2.29
Average 1.15
Segment A B C D E F G H I J K
Panel B: US-GAAP vs. IFRS assumptions
CSFB/Citigroup/Morgan Stanley (for US-GAAP) 0.77 0.58 0.77 0.28 0.44 0.60 0.46 0.83 0.49 0.55 0.53
Bloomberg (for IFRS) 1.15 0.80 1.01 0.56 0.92 0.79 0.68 1.04 1.04 0.77 0.67
Scenario b
im
r
f
r
m
À r
f
Fair value ‘Buffer’
abs. (€) D abs. (€) D
Panel C: effects on the fair value of a CGU
IFRS ‘‘base case’’ 1.15 0.0340 0.050 5,080,280 n.a. 926.554 n.a.
Scenario A 0.77 0.0450 0.050 6,198,180 22.0 2,044,454 121.0
Scenario B 1.15 0.0481 0.050 5,089,543 0.2 935,817 1.0
Scenario C 1.15 0.0450 0.047 5,253,782 3.4 1100.056 18.7
Scenario D 0.77 0.0481 0.047 6,383,492 25.6 2229.766 141.0
This example illustrates an impairment test for a cash-generating unit (CGU), comprising assets with an overall carrying amount of €4.15 million, including
€0.89 million of goodwill. With the parameters used for IFRS, the fair value of the CGU amounted to €5.08 million. Thus, the ‘buffer’ of the CGU was €0.93
million, which ?rst had to be used up before goodwill would need writing down. As reported under scenario A, the effect of using the beta according to the
data provided by CSFB/Citigroup/Morgan Stanley (b = 0.77) rather than that from Bloomberg (b = 1.15) would have been to increase the CGU’s fair value by
22%. Accordingly, the goodwill impairment buffer would have increased by 121% to more than € 2.0 million. The rather slight changes in r
f
and r
m
À r
f
have
less strong effects on fair value (scenarios B and C), but changing all parameters together would have increased the goodwill buffer by 141% (scenario D).
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 11
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
auditable input values.’ E2 noted the following super?cial
concern, which was restricted to only the appearance of
epistemological objectivity: ‘It is not possible to adjust
our plans and assumptions every year, because the audi-
tors will not tolerate such changes, and we as a company
would appear unreliable.’
In this context of being faced with the possibility of
extensive and ultimately arbitrary discussions with its
auditors, P1 adopted an approach of simplifying the infor-
mation provided to the auditors, thereby narrowing the
scope for discussion and the potential for disagreement. P1
described that its own ?nancial control department rou-
tinely modelled alternative scenarios for future revenues
from major drug patents, yet only a subset of this
information was discussed with the auditors in the
determination of how to represent the fair values of these
intangibles:
‘We ?nd it hard to argue with our auditors for every small
parameter. The more complex valuation gets, the more
?exibility we have, and the more discussions we have with
the auditors. This is why we come up with a single revenue
stream and avoid scenario-based valuation models, where
we have to argue about the probabilities and the particular
cash ?ow streams.’
[P1]
This ‘management’ of the process of representing fair
values, given the absence of any epistemologically objec-
tive claim to the market ontology demanded by IFRS 13,
came down to ?nding whatever alternative representation
would most readily satisfy the auditors. A striking conse-
quence of this approach was to represent an ontology that
is explicitly inconsistent with IFRS 13, namely the reporting
entity’s own perspective, as opposed to the perspective of
the market. This subverting of IFRS 13 was evident
throughout the case studies. For example, P3 claimed to
‘stick with the principle of using the same assumptions
for fair value as we use for our controlling purposes, as long
as the auditors approve.’ In much the same spirit, I2
defended the use of entity-speci?c cash ?ows as follows:
‘to justify our practice to the auditors, we help ourselves
with the thought that we do not see any reasons as to
why an external would apply different assumptions and
methods from an internal.’ This was a general theme. I1
claimed to proceed ‘by simply assuming a market partici-
pant would both operate the plant and the portfolio in
the same way as the reporting entity does and have the
same supply conditions.’ E2 claimed to ‘see huge dif?cul-
ties in distinguishing between market- speci?c and
entity-speci?c values. Hence, we think there is always
the presumption that the market’s view is equivalent to
our view.’ E1 argued as follows:
With the knowledge I have, how can I pretend I am a typ-
ical market participant? I am not, so I will include entity-
speci?c elements automatically.
[E1]
A further illustrative example arose in the context of
impairment testing where, for each of the six case study
companies which apply IFRS and US-GAAP ‘side-by-side’,
or which recently have switched from US-GAAP to IFRS,
there was claimed to be hardly any difference between fair
value under US-GAAP and value-in-use under IFRS.
14
In
other words, the fall-back position is the perspective of the
entity, rather than that of the market.
Overall, the evidence here is not only that fair values do
not represent the market ontology in IFRS 13, but that they
also actually subvert the fair value idea by instead seeking
to represent the ontology that IFRS 13 explicitly rules out.
In turn, and as we discuss next, we found evidence to sug-
gest a sort of irony in the application of IFRS 13, whereby
the practices above, which might be described as stabilis-
ing the internal preparation of fair values, were associated
with a varied and inherently unstable accounting
representation.
An unstable representation
We have so far described a process that does not lead to
the creation of new institutional facts. The underlying
problem is the absence of epistemologically objective
claims that could serve as the basis for collective intention-
ality with respect to IFRS 13’s market ontology. In turn, a
consequence of this absence of underlying unity of purpose
was that different practices emerged. There was, for exam-
ple, signi?cant variation across the case companies in the
design of DCF models, even when the models were being
applied to similar assets. In the telecom group, one case
company generally used detailed cash ?ows for 10 years,
whilst an interviewee in an industrial case company
insisted on the impossibility of making detailed predic-
tions for longer than ?ve years, ‘because of the rapidly
changing characteristics of the industry’ (I3). Similar obser-
vations were made within the pharmaceutical group,
where the forecasting horizon ranged between three and
ten years. In another variation, P2 described its process
as follows:
We use a standard valuation model, independent of
whether it is a research project or a patent which is to
be valued. Generally, we apply a uni?ed procedure: for
the ?rst ?ve years, numbers are as exact as possible; for
the next ?ve years, we use a rough estimate; and for
another ?ve years, we work by ‘rule of thumb’.
[P2]
A number of interviewees stated they were uncertain to
what extent future cash ?ows should include future devel-
opments like technological improvements and expansion
to new or different markets. Interviewees perceived con-
?ict between accounting in an ‘as of today’ status and a val-
uation that should primarily be based on the perspective of
the market. As one interviewee stated, this issue is concep-
tually less problematic for value-in-use, where the mea-
surement objective clearly excludes ‘any estimated future
14
In contrast with US GAAP, recoverable amount under IAS 36 is based
upon the higher of (entity-speci?c) value-in-use and fair value less costs to
sell. If there were differences with fair value under US GAAP, they were
caused by the ‘cost to sell’ component, which in this context is conceptually
the only difference between fair value usage in IFRS and in US GAAP (arising
in cases where IFRS fair value less cost to sell is greater than value-in-use
but less than the carrying amount).
12 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
cash in?ows or out?ows expected to arise from future
restructurings or from improving or enhancing the asset’s
performance’ (IAS 36, par. 33). In contrast, the struggle to
conceptualise the market participant’s perspective seemed
to lead to speculative thinking. E1 perceived that the ‘mar-
ket valuation always tends to include a sort of hope value,
whilst the business plan generally does not, as it is more
based on what one knows.’ The term ‘hope value’ describes
an increase in value which is produced by the belief that
there is a chance that the economic, technological or polit-
ical situation improves signi?cantly, so that the expected
cash ?ows turn out to be higher than expected in the busi-
ness plan. E1 argued that this hope value should theoreti-
cally be taken into account in the way that cash ?ows are
forecasted, if the market’s view is implemented.
There are two things happening here. The ?rst is the
transformation from ‘accounting as history’ to ‘accounting
as economics’, as the representation of fair value served to
draw accounting away from its traditional transactions-
basis and towards speculation around future cash ?ows.
P2, for example, referred to a ‘turning away from fact-
based accounting numbers,’ which was perceived to be a
major change from prior experience. Second, however,
the ‘accounting as economics’ being practised was not
the single market ontology of IFRS 13 but instead a range
of subjective ontologies, as each reporting entity sought
to represent fair value in its own way. This is in direct con-
?ict with the fair value idea under IFRS 13, whereby report-
ing entities are in principle required to not represent their
own views (which could reasonably be idiosyncratic) but
instead the collective view of the market (which IFRS 13
characterises as external and objective).
A consequence of this variety in practice, and of the
absence of social consensus lying behind the variety, was
a general sense of unease about where the process of
FVM implementation might lead. The concern here lay
beyond the preparers’ capacity to stabilise and control
their own processes of preparing fair values. Rather, the
concern followed from recognising that all entities were
building castles on the sand. The anxiety was expressed,
for example, that some companies would ‘use the areas
of judgement more than others’ (I2), and that this might
‘have a signi?cant impact on the accounts and conse-
quently on the competition at the capital markets’ (P1).
The concern here goes beyond whether it was possible to
represent the market ontology of fair value. Instead, the
concern is one of uncertainty with respect to the inher-
ently arbitrary and unstable nature of the representation
of fair value required by IFRS 13, and of the potential for
others to enact those requirements differently. In a similar
manner, the uncertain response of investors was also a
source of concern. E2 asserted that ‘?nancial statement
users do not understand how the fair values are calculated,’
in comparison with cost-based accounting measures,
which E3 described as ‘easily comprehensible, based on
historical cost, expected useful life and asset age.’ And if
these were data that investors did not understand, then
this gave rise to a related concern, over how investors
would respond to ?nancial statements prepared on the
basis of FVM. As I2 summarised in the context of the
income statement effect of FVM, there was a perceived risk
of ‘a dangerous and uncontrollable factor for the ?nancial
statements.’
Conclusion
We have argued in this paper that the process of repre-
senting fair values in ?nancial statements involves either
the reporting of institutional facts already in existence or,
in cases where IFRS 13’s market ontology does not exist
and so cannot be represented objectively, the creation of
data that do not themselves constitute new institutional
facts. We ?nd empirically that the latter of these two pos-
sibilities is dominant, and that preparers of ?nancial state-
ments therefore ?nd ways to ‘work around’ the
‘requirement’ in IFRS that reported fair values should rep-
resent the unknowable.
The main theoretical implication of our paper rests
upon the observability of the market ontology in FVM,
which in turn rests upon the existence of an underlying
institutional reality. Searle’s analysis is that collective
intentionality is required to create constitutive rules (sta-
tus declaration functions) which, if generally accepted,
bestow rights and obligations. While ontologically subjec-
tive, these rights and obligations constitute the institu-
tional reality that ?nancial reporting seeks to represent
in the form of assets and liabilities. Such a reality is in prin-
ciple knowable. That is to say, whether or not there exist
(epistemologically objective) institutional facts, there does
exist an institutional reality. If, however, in the cases
where FVM’s market participant is hypothetical, and so
there does not exist an institutional reality, then of course
that ‘reality’ cannot be known. While IFRS 13 does explic-
itly address epistemological variation in its Levels 1–3 clas-
si?cation, such variation is in principle irrelevant if there
does not exist an institutional reality to which an episte-
mological claim can be made. What IFRS 13 fails to
address, therefore, is ontological variation. Instead, it
makes a commitment to a single, market ontology, both
in cases where there does exist an institutional reality,
and yet also in cases where that ‘reality’ can only be
wished-for.
An implication of the above for accounting practice,
except at Level 1, is that representations of fair value can-
not be from the market participant’s perspective – as they
are purported to be under IFRS – and that a set of demands
is thereby placed upon actors to ?nd ways to represent
that which cannot be represented. A further implication
is that an aggregate amount represented as ‘fair value’
can be the sum of the values of both institutional facts
and non-institutional facts, giving that amount no obvious
meaning.
Our evidence is that actors’ responses to these demands
can be interpreted as going partway towards the creation
of institutional facts. There is collective intentionality on
the part of preparers, third party experts and auditors, in
the acts of outsourcing fair value determination to third
party experts, ?nding ways to reach agreement with audi-
tors on acceptable representations of fair value, and dis-
cussing within reporting entities how to apply IFRS 13.
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 13
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
This collective intentionality takes the form ‘we are seek-
ing to represent fair value.’ And having reached agreement,
there is then the imposition of a status declaration func-
tion, of the form ‘these reported amounts (X) count as fair
values (Y) in the context of ?nancial reporting (C).’ Criti-
cally, however, the creation of institutional facts requires
a further step, beyond collective intentionality and status
function declaration, which is that there must also be col-
lective acceptance. In one sense, this step cannot be taken
in practice for FVM outside Level 1, because the possibility
of collective acceptance is denied by the absence of an
institutional reality, by the reported fair values being a
‘representation’ of non-existent rights and obligations. In
another sense, however, the accounting representation
might, so to speak, substitute for the real thing. In general
in ?nancial reporting, the users of ?nancial statements
observe the accounting data, and not the underlying rights
and obligations that those data purport to represent. The
possibility exists, therefore, that there might be collective
acceptance of reported values, and that these might be
accepted as institutional facts, notwithstanding that they
do not actually represent any underlying institutional real-
ity and also that (as our evidence suggests) they might
actually represent the perspective of the preparer instead
of the wished-for market ontology of IFRS 13. While this
possibility may exist, however, our ?eldwork suggested
reasons to question its role in practice. We found that,
‘under the surface’ of preparers’ attempts to stabilise
accounting representations of fair value, there was varia-
tion and inherent instability in practice in determining
reported amounts, as well as a degree of anxiety over
how those amounts might be interpreted and used. The
implication is that the accounting might not ‘substitute
for the real thing,’ and that some form of instability is
implied by detaching representations of fair value from
an anchor of institutional reality. Our paper therefore leads
to the question of the status of reported fair values that are
neither institutional facts nor are likely to nevertheless be
accepted as such.
Our evidence does not, however, extend far enough to
explore this question further, because it is restricted to
the preparation of ?nancial statements. While, in common
with studies such as Burchell et al. (1985) and Hopwood
(1987), we have explored the calculative role of accounting
in reframing economic space, a contrast with these studies
is that we have not also explored whether and in what
ways such reframing contributes to constituting new social
and institutional reality, for example by means of different
nexuses of practices and material arrangements. Our paper
therefore presents only part of a story. We have not fully
explored how, in the sense described by Schatzki (2005),
the reconstruction of social reality is enacted through the
development of new practices and material arrangements,
as preparers ?nd new ways of ‘knowing’ and of following
different rules towards different ends. The opportunity is
to explore more broadly the context within which the
social is reconstructed (Schatzki (2005). A wider story
would also bring into play what Miller and Power (2013)
describe as an accounting complex, involving four key
roles of accounting in territorialising (the recursive con-
struction of calculable spaces), mediating (linking actors
and arenas), adjudicating (evaluating performance) and
subjectivising (control or regulation). While our paper
touches upon each of these roles, it does so only incom-
pletely, as each also has social and institutional dimensions
that lie beyond the scope of our analysis of the fair value
idea in IFRS and of ?eldwork that includes only preparers
of ?nancial statements. Most obviously, the representation
of fair values creates new, epistemologically objective data
which, while not in themselves institutional facts, can form
the basis for collective intentionality and so the creation of
new institutional facts that confer deontic powers. A sim-
ple example would be that fair values represented using
Level 3 data could become embedded in contractual agree-
ments, thereby conferring the deontic powers of economic
rights or obligations. While our paper has explored how
practitioners seek to represent fair values, a further level
of analysis lies in consideration of how those fair values
then further in?uence behaviours, within and outside
reporting entities. A related, alternative approach would
be to consider why preparers and auditors are willing to
accept the requirement to represent the hypothetical mar-
ket ontology in the ?rst place, and why there is not resis-
tance but instead acquiescence with respect to the
constitutive rule-making authority of the IASB. In this con-
text, IFRS itself can be understood as an institutional fact.
There is collective intentionality on the part of the IASB
and its stakeholders (‘we are setting accounting stan-
dards’), there is a status declaration function (‘IFRS (x)
counts as the rules for accounting representations in
the context of ?nancial reporting (c)’) and the evidence
above is that there is also collective acceptance (by prepar-
ers and auditors) of the institutional reality so created, of
IFRS itself. Yet, while the relevant actors agree that IFRS
has binding normative force, and while there is epistemo-
logical objectivity (institutional facticity) in the wording of
the accounting standards themselves, such standards
remain ontologically subjective, being the product of
human negotiation and agreement and having no reality
outside of this collective agreement process. This subjec-
tivity of foundation, together with the instability of out-
come described above, suggests fertile ground for further
change in what counts as an accounting representation.
This further consideration of the accounting complex
links our study with others in the literature. For example,
as our ?eldwork did not include auditors, an obvious com-
panion to our study would be an exploration of the repre-
sentation of fair value from the auditors’ perspective,
contributing to the literature on the role of the audit pro-
fession in the development of ?nancial reporting practice
(Botzem & Quack, 2009; Cooper & Robson, 2006; Power,
2003). The role of the auditor is particularly interesting
in the light of the inherently unauditable nature of the
(hypothetical) market ontology in IFRS 13 (Bayou,
Reinstein, & Williams, 2011) with implications for social
acceptance and for the strategies that auditors adopt in
order to represent themselves as relevant experts in an
unknowable domain (Power, 1997). There are likewise
implications for the accountability of management
because, notwithstanding the hypothetical nature of the
market ontology, newly reported amounts are likely to cre-
ate demands for new behaviours, to explain and respond to
14 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
the entity’s revised representation of itself (Williams,
2002; Young & Williams, 2010). A further issue, also
related to the implausibility of the market ontology, is
the inherent instability of the attempt to represent fair
value, which draws parallels with other attempts in analo-
gous domains, such as accounting for brands (Napier &
Power, 1992), in?ation (Robson, 1994), value-added
(Burchell et al., 1985) and liabilities (Morley, 2014). The
common theme here is for further research to go beyond
how fair value is represented and to consider also how it
is itself constitutive, as the representation of fair values
becomes part of what Callon (1998) describes as the
‘shared culture, rules, procedures, routines or conventions’
that in?uence the calculative frame of behaviour in repre-
senting economic activity (Carruthers, 1995; Hines, 1991;
Vollmer et al., 2009).
Acknowledgments
The authors are very grateful to Robert Monks and
to the Cambridge European Trust, for providing ?nancial
support for this research project. The authors also grate-
fully acknowledge valuable comments from the Reviewers
and from Andrew Brown, Chris Chapman, Christopher
Napier, Mike Power, Keith Robson, Peter Walton, Geoff
Whittington and Joni Young.
References
Barrett, M., Cooper, D., & Jamal, K. (2005). Globalization and the
coordinating of work in multinational audits. Accounting,
Organizations and Society, 30(1), 1–24.
Barth, M. E. (2007). Standard-setters, measurement issues, and the
relevance of research. Accounting and Business Research, 37(3), 7–15.
Barton, A. D. (1974). Expectations and achievements in income theory.
The Accounting Review, 49(4), 664–681.
Basu, S., Kirk, M., & Waymire, G. (2009). Memory, transaction records, and
The Wealth of Nations. Accounting, Organizations and Society, 34(8),
895–917.
Baudrillard, J. (1983). Simulations. New York: Semiotext(e).
Bayou, M., Reinstein, D., & Williams, P. (2011). To tell the truth: A
discussion of issues concerning truth and ethics in accounting.
Accounting, Organizations and Society, 36, 109–124.
Beaver, W. (1989). Financial reporting: An accounting revolution.
Englewood Cliffs, NJ: Prentice-Hall.
Benston, G. (2006). Fair-value accounting: A cautionary tale from Enron.
Journal of Accounting and Public Policy, 25, 465–484.
Berger, P., & Luckmann, T. (1966). The social construction of reality: A
treatise in the sociology of knowledge. Garden City, NY: Anchor Books.
Botzem, S., & Quack, S. (2009). (No) limits to Anglo-American accounting?
Reconstructing the history of the International Accounting Standards
Committee: A review article. Accounting, Organizations and Society, 34,
988–998.
Bougen, P. D., & Young, J. J. (2011). Fair value accounting: Simulacra and
simulation. Critical Perspectives on Accounting.
Bromwich, M. (2007). Fair values: Imaginary prices and mystical markets
– A clari?catory review. In P. Walton (Ed.), The Routledge companion to
fair value and ?nancial reporting (pp. 46–68). Routledge.
Burchell, S., Clubb, C., Hopwood, A., Hughes, S., & Nahapiet, J. (1980). The
roles of accounting in organisations and society. Accounting,
Organizations and Society, 5, 5–27.
Burchell, S., Hopwood, A., & Clubb, C. (1985). Accounting in its social
context: Towards a history of value added in the UK. Accounting,
Organizations and Society, 10(4), 381–413.
Callon, M. (Ed.). (1998). The laws of the markets. London: Blackwell.
Carruthers, B. (1995). Accounting, ambiguity, and the new
institutionalism. Accounting, Organizations and Society, 20(4),
313–328.
Chambers, R. (1965). Measurement in accounting. Journal of Accounting
Research, 3(1), 32–62.
Chambers, R. (1966). Accounting, evaluation and economic behavior. New
Jersey: Prentice-Hall.
Cooper, D., & Morgan, W. (2008). Case study research in accounting.
Accounting Horizons, 22(2), 159–178.
Cooper, D., & Robson, K. (2006). Accounting, professions and regulation:
Locating the sites of professionalisation. Accounting, Organizations and
Society, 31(4/5), 415–444.
Davis, S., Menon, K., & Morgan, G. (1982). The images that have shaped
accountingtheory. Accounting, Organizations andSociety, 7(4), 307–318.
Edwards, E. O., & Bell, P. W. (1961). The theory and measurement of business
income. University of California Press.
Eisenhardt, K. (1989). Building theories from case study research.
Academy of Management Review, 14(4), 532–551.
Elder-Vass, D. (2013). The reality of social construction. Cambridge:
Cambridge University Press.
FASB (2000). Status of concepts statement no. 7, using cash ?ow information
and present value in accounting measurements. Norwalk, CT: FASB.
Flyvbjerg, B. (2006). Five misunderstandings about case-study research.
Qualitative Inquiry, 12(2), 219–245.
Gaynor, L., McDaniel, L., & Yohn, T. (2011). Fair value accounting for
liabilities: The role of disclosure in unraveling the counterintuitive
income statement effects from credit risk changes. Accounting,
Organizations and Society, 36, 125–134.
Gwilliam, D., & Jackson, R. (2008). Fair value in ?nancial reporting:
Problems and pitfalls in practice: A case study analysis of the use of
fair valuation at enron. Accounting Forum, 32, 240–259.
Hayek, F. (1945). The use of knowledge in society. American Economic
Review, 35(4), 519–530.
Hines, R. (1988). Financial accounting: In communicating reality, we
construct reality. Accounting, Organizations and Society, 13(3), 251–261.
Hines, R. (1991). The FASB’s conceptual framework, ?nancial accounting
and the maintenance of the social world. Accounting, Organizations
and Society, 16(4), 313–331.
Hopwood, A. (1987). The archaeology of accounting systems. Accounting,
Organizations and Society, 12, 207–234.
IASB (2010). The conceptual framework for ?nancial reporting. London:
IASB.
IASB (2013). International ?nancial reporting standards. London: IASB.
Ijiri, Y. (1983). On the accountability-base conceptual framework of
accounting. Journal of Accounting and Public Policy, 2, 75–81.
Ijiri, Y., & Jaedicke, R. (1966). Reliability and objectivity of accounting
measurements. The Accounting Review, 474–483.
Klamer, A., & McCloskey, D. (1992). Accounting as the master metaphor of
economics. European Accounting Review, 1(1), 145–160.
Landsman, W. (2007). Is fair value accounting information relevant and
reliable? Evidence from capital market research. Accounting and
Business Research, 37(3), 19–30.
Laux, C., & Leuz, C. (2009). The crisis of fair value accounting: Making
sense of the recent debate. Accounting, Organizations and Society, 34(6/
7), 826–834.
Lennard, A. (2007). Between a rock and a hard place. In P. Walton (Ed.),
The Routledge companion to fair value and ?nancial reporting
(pp. 115–122). Routledge.
Macintosh, N., Shearer, T., Thornton, D., & Welker, M. (2000). Accounting
as simulacrum and hyperreality: Perspectives on income and capital.
Accounting, Organizations and Society, 25(1), 13–50.
MacKenzie, D. (2009). Material markets. Oxford: Oxford University Press.
McGregor, W. (2007). Whither fair value accounting? In P. Walton (Ed.),
The Routledge companion to fair value and ?nancial reporting
(pp. 103–114). Routledge.
McKernan, J. (2007). Objectivity in accounting. Accounting, Organizations
and Society, 32, 155–180.
Miller, P. (1998). The margins of accounting. European Accounting Review,
7, 605–621.
Miller, P., & Power, M. (2013). Accounting, organizing and economizing:
Connecting accounting research and organization theory. The
Academy of Management Annals, 7(1), 557–605.
Morgan, G. (1988). Accounting as reality construction: Towards a new
epistemology for accounting practice. Accounting, Organizations and
Society, 13(5), 477–485.
Morley, J. (2014). Where culture and lobbying collide: The case of the
IASB Liabilities Project. Working paper: LSE.
Mouck, T. (2004). Institutional reality, ?nancial reporting and the rules of
the game. Accounting, Organizations and Society, 29(5/6), 525–541.
Murphy, T., O’Connell, V., & O’hOgartaigh, C. (2013). Discourses
surrounding the evolution of the IASB/FASB Conceptual Framework:
R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx 15
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004
What they reveal about the ‘‘living law’’ of accounting. Accounting,
Organizations and Society, 38, 72–91.
Napier, C., & Power, M. (1992). Professional research, lobbying and
intangibles: Review essay. Accounting and Business Research, 23(89),
85–95.
Nobes, C. (1983). A judgmental international classi?cation of ?nancial
reporting practices. Journal of Business Finance and Accounting, 10(1),
1–19.
Pettigrew, A. (1995). Longitudinal ?eld research on change – Theory and
practice. In G. Huber & A. Van de Ven (Eds.), Longitudinal ?eld research
methods: Studying processes of organizational change. Thousand Oaks,
CA: Sage Publishers.
Power, M. (1997). Expertise and the construction of relevance:
Accountants and environmental audit. Accounting, Organizations and
Society, 22(2), 123–146.
Power, M. (2003). Auditing and the production of legitimacy. Accounting,
Organizations and Society, 28, 379–394.
Power, M. (2010). Fair value accounting, ?nancial economics and the
transformation of reliability. Accounting and Business Research, 40(3),
197–210.
Ragin, C., & Becker, H. (Eds.). (1992). What is a case? Exploring the
foundations of social inquiry. Cambridge: Cambridge University Press.
Ravenscroft, S., & Williams, P. (2009). Making imaginary worlds real: The
case of expensing employee stock options. Accounting, Organizations
and Society, 34(6/7), 525–541.
Roberts, J., & Jones, M. (2009). Accounting for self-interest in the credit
crisis. Accounting, Organizations and Society, 34, 856–867.
Robson, K. (1991). On the arenas of accounting change: The process
of translation. Accounting, Organizations and Society, 16(5/6),
547–570.
Robson, K. (1994). In?ation accounting and action at a distance: The
Sandilands episode. Accounting, Organizations and Society, 19(1),
45–82.
Roesch, E. (1978). Principles of categorization. In E. Roesch & B. B. Lloyd
(Eds.), Cognition and categorization (pp. 27–48). Hillsdale: Lawrence
Erlbaum Associates.
Schatzki, T. R. (2005). Peripheral vision the sites of organizations.
Organization Studies, 26(3), 465–484.
Searle, J. (1995). The construction of social reality. London: Penguin.
Searle, J. (2005). What is an institution? Journal of Institutional Economics,
1(1), 1–22.
Searle, J. (2010). Making the social world. Oxford: Oxford University Press.
Searle, J. (1990). Collective intentions and actions. In P. Cohen, J. Morgan,
& M. E. Pollack (Eds.), Intentions in communication. Cambridge, Mass:
Bradford Books, MIT Press.
Shapiro, B. (1997). Objectivity, relativism, and truth in external ?nancial
reporting: What’s really at stake in the disputes? Accounting,
Organizations and Society, 22(2), 165–185.
Slater, D., & Tonkiss, F. (2001). Market society: Markets and modern social
theory. Cambridge: Polity Press.
Smith, B. (2003). John Searle: From speech acts to social reality. In B.
Smith (Ed.), John Searle. Cambridge: Cambridge University Press.
Sterling, R. (1970). Theory of the measurement of enterprise income.
Lawrence, KA: University of Kansas Press.
Vollmer, H., Mennicken, A., & Preda, A. (2009). Tracking the numbers:
Across accounting and ?nance, organizations and markets.
Accounting, Organizations and Society, 34(5), 619–637.
Walton (Ed.). (2007). The Routledge companion to fair value and ?nancial
reporting. Routledge.
Whitley, R. (1986). The transformation of business ?nance into ?nancial
economics: The roles of academic expansion and changes in US
capital markets. Accounting, Organizations and Society, 11, 171–192.
Williams, P. F. (2002). Accounting and the moral order: Justice,
accounting, and legitimate moral authority. Accounting and the
Public Interest, 2, 1–21.
Young, J. (1994). Outlining regulatory space: Agenda issues and the FASB.
Accounting, Organizations and Society, 19(1), 83–109.
Young, J. (2006). Making up users. Accounting, Organizations and Society,
31, 579–600.
Young, J., & Williams, P. F. (2010). Sorting and comparing: Standard-
setting and ‘‘ethical’’ categories. Critical Perspectives on Accounting, 21,
509–521.
16 R. Barker, S. Schulte / Accounting, Organizations and Society xxx (2015) xxx–xxx
Please cite this article in press as: Barker, R., & Schulte, S. Representing the market perspective: Fair value measurement for non-?nancial
assets. Accounting, Organizations and Society (2015),http://dx.doi.org/10.1016/j.aos.2014.12.004

doc_497741567.pdf