Let the fox guard the henhouse: How relaxing the three-level fair value hierarchy increases the reliability of fair value estimates

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Abstract

The International Financial Reporting Standards (IFRS) have been developed to harmonize corporate accounting practices and to answer the need for high-quality standards that result in high-quality information, transparency and comparability in issuing financial reports. According to Palea and Maino, IFRS 13's fair value hierarchy results in assets being presented according to their liquidation value, which does not suit investments made by going concerns. The three-level hierarchy requires that a firm must measure fair values using level 1 inputs if available. If level 1 inputs are unavailable, then level 2 inputs may be used. Hence, level 3 measures are allowed only if neither level 1 nor level 2 inputs are available. The standards are clear in that the valuation technique the entity uses must maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
Original languageEnglish
Title of host publicationThe Routledge Companion to Fair Value in Accounting
EditorsGilad Livne, Garen Markarian
PublisherRoutledge Taylor & Francis Group
Number of pages14
StatePublished - 2018

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