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Fair, but for whom?

Fair-value accounting is supposed to help investors. Paradoxically, it could have the opposite effect
Fair, but for whom?

Fair – surely no word is used more in a quoted company’s accounts. Perhaps that’s understandable since a company’s directors can only approve their company’s financial statements if they are satisfied that the figures give a “true and fair” view. Thus – taking a FTSE 100 company at random – the directors of Associated British Foods (ABF) spell it out on page 110 of the company’s latest annual report: “We confirm that to the best of our knowledge the financial statements... give a true and fair view of the assets, liabilities, financial position and profit or loss of the company” and so on.

On the surface, there is nothing to dislike about such a statement. ‘True’ and ‘fair’ are effectively synonymous – it would not be possible for a set of accounts to be untrue and fair. So, in effect, the only word that matters is ‘fair’ – a company’s accounts are judged to be ‘fair’. And that’s where we start to encounter complications.

In accounting, ‘fair’ often means ‘fair value’ and fair-value accounting often equals ‘mark-to-market’ accounting, which basically means what it says. In other words, the value of assets and liabilities in a company’s accounts are stated at a market value, an up-to-date value that is derived either from an active market of buyers and sellers or, in theory, from an acceptable proxy. 

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