Information is said to be relevant if it is able to influence the economic decisions of users by enabling them to evaluate past, present or future events or by confirming, or correcting, their past evaluations (IASB, 2009b:82). The information about the current level and structure of asset holdings has value to users when the users endeavour to predict both the ability of the entity to take advantage of opportunities and its ability to react to adverse situations (IASB, 2009b:82).
According to Argiles, Bladon, and Monllau (2008), the use of fair value does not indicate any evidence of differences in profitability caused by accounting manipulation. Accordingly, farm cash flows are not less predictable with fair valuation than with historical cost. Argiles et al. (2008) concluded that there are no differences in the relevance of accounting information brought about by fair valuation. As a result of the nature of agricultural activities, it is not feasible to expect accurate and reliable cost calculations. Farmers also often perceive accounting procedures as unnecessary, other than for tax purposes. Accordingly, farmers prefer to use a simplified model such as an average of insurance companies’ valuations to estimate the value of biological assets. 2.9.5.1 Reliability
Reliable information is devoid of mistakes and prejudices, and users may depend on it to faithfully represent that which it either purports to represent or may reasonably be expected to represent (IASB, 2009a). However, not all relevant information is reliable. In
their comment on the discussion paper on fair value measurement, Ernst and Young (2007) raised the question as to the reason why exit price may provide more useful information about the timing, amount and uncertainty of cash flows than the value in use of the relevant asset, unless the asset is held for sale. Another concern was in a situation where the highest and best use of an asset is different from current use, in which case the asset is valued at alternative use. According to Ernst and Young (2007), this alternative use may involve other assets and obligations, and there is a stacking of assumptions. The reliability of fair value estimates using models does not depend solely on how well a model reproduces conventional market pricing processes, but also on the reliability of the model’s data inputs. The model of fair value should consider both inputs and assumptions that marketplace participants would use. In their response to the discussion paper on the fair value reporting of biological assets, Deloitte and Touche (1997) noted that the standard for the reliability of fair value measures as proposed was not sufficiently rigorous and that fair value constitutes a reliable measure only if:
(i) The asset is ready for conversion into cash;
(ii) There is high assurance of realisation of the asset; (iii) Ready market exists for the asset; and
(iv) The market price of the asset is ready to be determined.
Deloitte and Touche (1997) again observes that in the absence of any of these conditions, assets should be measured at cost. D’Souza (2008) mentions further that in spite of the fact that fair valuation may, at times, be subjective and display a degree of possible unreliability to the values, such values are still tremendously useful in terms of decision-making because they represent the economic certainty as opposed to an accounting “fiction” in the form of historical cost. Accordingly, unlike the historical model, it is comparatively difficult to use fair value to make decisions.
Chasan (2008) also stated that the critics of fair value argue that it provides a pragmatic view when there is availability of price quotes, but when markets do not exist, or there is a disappearance of markets at the time of credit crunch, companies are under obligation to apply complex mathematical models to come up with values that may be just as
confusing to investors. In his citing of the multibillion-dollar write-downs on sub-prime- related asset-backed securities and the other hard-to-price assets that companies such as Citigroup Inc and Merrill Lynch & Co Inc posted, Chasan (2008) notes that fair value is not worth the earnings volatility it creates.
2.9.5.2 Comparability
The IASB (2015: par 7) defines comparability in the exposure draft as that value of information that assists financial statement users to recognise differences and similarities between two sets of economic phenomena. Uniformity and comparability should not result in any impediment in the implementation of accounting standards as they are dissimilar. It is essential that accounting policies be continuously reviewed for both relevance and reliability with full disclosure of any change and the effects of such changes. D’Souza (2008) argues that fair value is a market-based measure that is not affected by factors specific to a particular entity; and, therefore, it represents a balanced measurement that is reliable from one period to another and across entities. The fair value, according to D’Souza (2008), would in that respect appear to augment comparability.
2.9.5.3 Understandability
There is an assumption that users have a reasonable knowledge of business and accounting and that they are willing to learn information with realistic assiduousness. Nevertheless, information that is relevant for the users of financial statements to take economic decisions should not be excluded from the financial reports as a result of the complexity of such information on the grounds that it will result in misunderstanding (IASB, 2009b). In an endeavour to enhance understandability, D’Souza (2008) notes that fair value measure eliminate the hundreds of rules underlying historical cost accounting. D’Souza (2008) further argues that in order to remove control of the reported numbers from corporate management, it should be required that the reported numbers for assets and liabilities be reported on a fair value basis. The revenues, expenses, gains and losses are accounting constructs and, thus, the starting point of eliminating manipulations must be assets and liabilities. The statement of comprehensive income should then reflect the movement of these assets and liabilities.