EFRAG is Against the Ban of Fair Value

A letter of comment regarding Green Paper "Long-term financing of the European economy" was submitted to the European Commission (EC) by the European Financial Reporting Advisor Group (EFRAG). EFRAG is of the opinion that use of fair value is important for achieving transparent and relevant financial reporting. Therefore, it should be required in these cases.

The debate in the Green Paper was primarily focused on the question that whether the use of fair value leads the investor behavior to short-termism.

EFRAG has shown opposition to ban of fair value by saying that it "does not make any sense to ban fair value as such". It should be noted that EFRAG has not denied that the use of fair value accounting can result in to a limited degree to short-termism in the investor behavior. EFRAG is of the view that when selecting the measurement basis for a particular item, the International Accounting Standards Board (IASB) should carefully take into consideration the information that measurement will generate and then suggest the most suitable measurement basis for that item.

EFRAG has stated that it is the responsibility of the constituents to "to ensure that fair value measurements are mandated only when they support high quality financial reporting".

EFRAG looked at the relationship between the use of fair value and the prudence. It concluded its opinion by stating "Exercising prudence does not, in itself, rule out measurement at fair value (or any other form of current value). If estimates provided have the appropriate level of reliability, and the use of current values provides the best representation of how assets and liabilities contribute to the entity's financial position and performance, then the use of fair value should be required."

The IASB, FEE, and Deloitte have also provided their response to this Green Paper. They are also of the view that fair value itself does not lead to short-termism.