Accounting and Management Information Systems

Vol. 9, No. 3, pp. 448–466, 2010

FAIR VALUE - FROM THE ROMANIAN

REALITY PERSPECTIVE

Mihai RISTEA and Ionel JIANU1

The Bucharest Academy of Economic Studies, Romania

ABSTRACT
The globalization of financial markets, the internationalization of
economic entities and the need to submit relevant information to
current and potential investors led to the progressive development of
the concept of fair value in accounting. Presently it is accepted that
fair-value measurement presents more relevant information than the
measurement at historical cost. But the reliability of fair value is
questioned because it depends very much on the asset which has to be
measured and the existence of active markets where assets can
theoretically be negotiated. In the absence of active markets, the
estimation techniques are often used to determine fair value with
sufficient reliability to satisfy qualitative characteristics of accounting
information. In order to reflect the reality of this new world, the IASB
has introduced IFRS accounting rules which require or recommend the
use of fair value measurement as the basis for most items in the
financial statements of an economic entity. The opportunity of
introducing this new concept has given rise to intense debate,
particularly as regards the financial instruments, to reach its peak with
the onset of financial crisis. Currently, discussions bearing on the
timing in which fair-value measurement will be extended to all
elements of financial statements. The purpose of this study is to answer
the next question: Are professional accountants in Romania ready to
apply a fair value accounting?

Fair value,
accounting
professional accountants, measurement, financial

1
Correspondence address: Ionel JIANU, The Bucharest Academy of Economic Studies, Romania,
Faculty of Accounting and Management Information Systems, 6 Piaţa Romană, sector 1, Bucureşti,
010374, E-mail: ionel_j@yahoo.com
 Fair value – from the Romanian reality perspective

INTRODUCTION

The evaluation is the process through which it is determined the value of the
structures in the financial statements which will be recognized in the balance sheet
and the profit and loss account. Making an evaluation means a great deal of
judgment. Framing this process in accountancy is very complex, causing problems.
The choice of the evaluation bases and the concept of maintaining the capital
determine the accountancy model used to elaborate financial statements. Various
accountancy models have different degrees of relevance and credibility. Regarding
the fair value model, we can say that it is both relevant and reliable, when there is
an active market for entity’s assets and liabilities. If there is not an active market
for all or part of the assets and liabilities of the entity, the relevance of the fair
value model will remains. However, its reliability depends on the accuracy of
alternative methods used by the entity to determine the fair value.
The preference for the fair value model depends on users of accounting information
feedback concerning the most important qualitative characteristic of accounting
information (although the framework given equal importance both reliability and
relevance of accounting information). If the balance is in favour of the relevance of
accounting information, then there will be many supporters of the fair value model.
But if the balance tilts in favour of the credibility of accounting information than
there will be many who will criticize the fair value model. Until the beginning of
the world economic crisis, the fair value model became so large, that, in the
present, most items in financial statements should be or could be, by exercising the
option prepared under IFRS, valuated at fair value. The economic crisis was the
cause who questioned the relevance of fair value. There were opinions that fair
value would be the trigger of the crisis, but this was not demonstrated. For this
reason these are only suppositions that give rise to discussions.

We consider that the first argument for a fair value valuation must come from the
theory of accounting, where recently we are assisting to the development of the two
current regarding accounting functions: contractual accounting theory and
information accounting theory. Under contractual theory, accounting allows
shareholders and creditors to ensure that managers effectively managed assets.
According to the information theory, the accounting provides users with relevant
information. However, these control and information functions are difficult to
dissociate them. The fair value meets the role of information accounting theory
more than any other basis of valuation. Financial reporting plays an informative
role, in this sense it should reflect the value of an entity at the time of valuation.
However, prudential rules are to ensure financial system stability and protection of
shareholders and creditors. Thus, the financial statements are informative and not
prudential. Our argument for a fair value accounting is that this measurement base
offers relevant information for decision making by reflecting the real value of the
entity at balance sheet date. Is this the opinion of Romanian professional
accountants? This is the question that will answer the following study.

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1. LITERATURE REVIEW

Interaction between accounting theory and practice enables the development from
an old technical accounting of the record to techno-science today and through its
dynamics to the science of the future. The binomial, theory and practice, has meant
and means the key to penetrate the mysteries of accounting. Studying this
relationship, it is not easy to talk about inductive or deductive. The discussion
becomes complicated due to difficulties for the award of certain judgments solely
accounting theory or practice. As for theory and practice, it is well known the
discussion related to establishing the basis for evaluation of the components of
financial statements in order to ensure credibility and relevance to the information
provided.

In theory and accounting practice several bases of evaluation have been proposed:
historical cost, current cost, realizable value, present value, fair value. Taking into
account the advantages and disadvantages of each of them, historical cost was the
main basis of measurement used in accounting (reliability, clearly defined,
verifiable data). In a stable economy, the benefits of the historical cost accounting
are higher than the accounting in current values. Problems arise in an inflationary
economy, where the historical cost accounting recognizes price increases as
income, which leads to a false result, with direct consequences for the
capitalization of the entity. The consequences of inflation on balance sheet items,
in general, and on capital and reserves, in particular, have led in national and
international legislation to adopt rules to govern them. Thus, following the
criticism of historical cost accounting, nowadays we can see the increasing use of
current values in the valuation of the financial statements. Fair value valuation
seems to become the accounting model promoted by IFRS, but this base of
measurement raises problems due to the complexity of economic reality that
wishes to translate. The concept of fair value is highly subjective because its
definition is different depending on which accounting referential defines it.

Currently, there are two dominant global accounting referential: IFRS and U.S.
GAAP. IFRS are based on principlesi and allow certain flexibility to entities and
auditors. U.S. GAAP are based on very detailed rulesii. In 2002, IASB and FASB
signed a memorandum in which they agreed to complete a project called
"International Convergence on the Short Term", with the main objective of
eliminating a number of differences between IFRS referential and U.S. GAAP by
early 2005. After that date it has been set the second stage, reflected in the joint
project called "Project of Common Verification of the International Convergence"
(Ristea et al., 2006). Contrary to the efforts of the two bodies of standardization,
convergence of the U.S. GAAP/IFRS is not a simple process primarily because
between the two accounting is a disagreement concerning the sphere of influence.
While U.S.GAAP is required by the entities seeking funding from the U.S. capital
markets, IFRS referential is recommended to the companies that seek to be listed

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on international capital markets. Therefore, IFRS are designed to cover a larger

area and refers to entities with different structures. Aware of this advantage of
IFRS, on November 17, 2007, SEC publicly announced that recognizes, from the
year 2007, the financial statements of foreign entities established under IFRS
without reconciliation to U.S. GAAP prior (SEC, 2007). In this regard, Johnson
(2008) said:
"Goodbye GAAP - It's time to start preparing for the arrival of International
Accounting Standards".
FASB defined for the first time the concept of fair value, since 1976, in FAS 13
“Accounting for leases”:
„the price at which the propriety can be sold in a transaction between parties
between which there is no relation’’
However, until recently, American accounting was heavily dependent on historical
cost in accounting valuation. In September 2006, FASB revealed clear intentions
concerning the use of fair value in accounting by SFAS 157 “Fair value
measurements”, with has effect from January 1st, 2008. SFAS 157 defines fair
value as:
”the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date”.
This definition reflects an ideal output value. Furthermore, only 5 months later
after the publication of SFAS 157, FASB published in February 2007, SFAS 159
“The fair value option for financial assets and financial liabilities” that permits and
encourages entities to elect presentation of financial assets and liabilities at their
fair value. It is noted that although the fair value was originally used to non-
financial assets, currently, under U.S. regulations, the fair value can be chosen as
the basis of valuation for financial assets.
SFAS 157 is today the starting point for the IASB project “Fair value
measurement” which defines fair value, establishes a framework for measuring fair
value and requires disclosures about fair value measurements. Exposure Draft (ED)
„Fair Value Measurement” issued by the IASB in May 2009 defines fair value
similar to FAS 157. Comments on the draft were received until September 28,
2009 and the emergence of this standard is expected for 2010. Under this project
the definition of fair value is similar to that of SFAS 157 and is determined in three
steps (IASB, 2009):

• “Level 1 represents quoted prices unadjusted in active marketsiii for

identical assets or liabilities that the entity can access at the
measurement date;

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• Level 2 represents inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices) that include quoted prices
for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or
liability, inputs that are derived principally from or corroborated by
observable market data by correlation or other means,
• Level 3 represents inputs for the asset or liability that are based on
unobservable market data which can be developed using the best
information available in the circumstances including an entity’s own
data.”

IASB used the fair value as a measurement basis, for the first time in 1998, once
with the appearance of the IAS 32 “Financial Instruments: Presentation” and IAS
39 “Financial Instruments: Recognition and measurement”. Fair value is not
defined by the conceptual framework, but we can find its definition into the
standards issued by the IASB, as follows:

„the amount for which an asset could be exchanged, or a liability settled,

between knowledgeable, willing parties in an arm’s length transaction.”

It is therefore an estimate and not a finding, as in market value. Fair value is thus a
transaction that could take place but did not actually occur (Raiman, 2007). The
fair value is also considered the basis within the standards issued by IASB (Capron,
2007). In 2007, Thouvenin numbered 3 996 usages of the term “fair value” within
IFRS. Currently, on the international level, fair value is increasingly used in the
financial position and performance measurement of an entity. Jianu (2009) in a
study regarding the use of fair value to measurement assets, under IFRS rules,
noted that the most of the elements must be measured in fair value or could be
measured in fair value, if the entity chooses this accountancy approach, as it is seen
in the following table:

Table 1. Fair value assets measurement in IFRS

ASSET Ulterior evaluation bases Recognition

Financial assets
- Assets available to sale Fair value - accountancy rule Equity
- Instruments held for trading Fair value - accountancy rule Net income

Tangible and intangible assets Fair value – accountancy Equity

option (alternative treatment)
Investments property Fair value – accountancy Net income
option (basic treatment)

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ASSET Ulterior evaluation bases Recognition

Non-current assets held for sale The minimum between cost Net income
and fair value minus the sale
costs - accountancy rule
Biological assets Fair value minus the costs Net income
estimated at the selling
centres - accountancy rule
Exploration and evaluation Fair value – accountancy Equity
assets option (alternative treatment)

Agricultural production Fair value minus the costs Net income

estimated at the selling
centres - accountancy rule
(Source: Jianu, 2009: 87)

But, there is a long way until one could get a complete valuation in fair values. The
valuation in fair value of all the elements of the balance sheet relies on the concept
according to which an asset is left and a liability is paid permanently. It is about the
observation of a virtual result. Because there is no real transaction, accountancy
would provide a piece of information upon what could happen. In an accountancy
model in fair value, the evaluation of the entity’s performance upon a certain
period will comprise the achieved and the non achieved results, determined, either
according to the market price, or the internal estimations. It will be difficult to
make a distinction at this level, between the objective evaluation of the
administration owned by the entity and the markets’ sanction upon the value of the
balance sheet elements. In such a context, Bernheim (1999) mentions:

“The hierarchy of the different financial statements will have to evolve:

profit and loss account will lose all or part of its interest of main element of
the performance, balance sheet will keep its significance of inventory value,
statements of changes in equity are pointless, while statement of the cash
flow will become the main document worthy of interest”.

The evaluation in fair value offers more complete information regarding the actual
value of the elements and meets the qualitative characteristic of the accountancy
information regarding transparency. The same author presents the advantages and
the qualities of the fair value as: predictive character: fair value is the best
prediction basis for the future financial flows; comparability: fair value reflects the
updated value of all the instruments no matter their nature; coherence: fair value is
adapted to the active administration of the financial risks; reduced complexity: an
unique evaluation model is simpler than a model which allows the application of
various methods of costs and value; neutrality: being determined by references to
external data, the fair value is independent out of the parties’ intention and quality,

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date of operations’ origin, the instruments’ nature. Regarding the full fair value
accounting, Barlev & Haddad, mentioned in an article written in 2003:

“Financial statements based on the fair value accounting supply

transparent information, since the income statement would reflect real
economic value of business activities and the balance sheet mirrors assets,
liabilities and equity measured at fair value.”

The measurement in fair value is good because it hinders the manipulation of

results by the managers, in comparison to the accountancy in historical costs which
allows the choice of the moment when these value pluses could turn up. In this
respect, Richard (2004) says that:

“the real manipulation consists of the power of deciding the distribution of

dividends on certain potential non achieved benefits, whereas the real non
manipulation is the obligation to notice the achieved results (in the moment
of sale) so as to make the distribution of dividends”.

But the manipulation can exist also in the situation in which it would be recognized
only the realised incomes. An example in this respect regarding the manipulation
of the result by using the fair value for the measurement of the assets appears in the
case of Enron Company’s bankruptcy. One of the means used by Enron to improve
its financial results consisted of selling an asset at the end of the financial exercise
to a “friend” company or a company founded especially with this purpose, and
buying again the asset at the same price at the beginning of the financial exercise
(Gwilliam & Jackson, 2008). This sale operation allowed the transformation of the
potential value pluses in realised value pluses, with direct consequences upon the
result of the exercise.

Professionals are discontent with the high costs for the calculation of the fair value,
the increased volatility of the accounting data and the difficulties appeared to
evaluate and compare non negotiable assets. The fair value is not necessarily a
value which is established on an active market but it could be an estimated
negotiation value or an actual value which is extremely manipulative. From a
practical point of view, the accountants should make an accounting document in
which they should show how the fair value is established by them. Even in this
way, the result in fair values could be manipulated because for some of the
company’s assets there is not a market price and it will be chosen internal models
of evaluation.

As long as the markets are liquid, the application of the fair value does not rise real
difficult problems, but, in the situation of existing the non liquid market, the
entities must rely on the internal methods for the calculation of fair value or on the
other market parameters, which in these conditions are difficult to be estimated.

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The impact of the valuation in fair values is significant. A recent study made upon
the banking companies from France, quoted at the Stock Exchange, which applies
IFRS, demonstrated that the evaluation in fair values of all the elements of the
balance sheet leads to a result three times higher than the net income (Hamida,
2007). Also, Hodder et al. (2006), following a study made on 202 commercial
banks quoted at the Stock Exchange, emphasized the fact that, if there had been
used the fair value for the evaluation of all the elements in the balance sheet, then
new result obtained would have been three times higher than the comprehensive
income and five times higher than the net income.

The reliability, objectivity, neutrality are indispensable qualities in accountancy

which cannot be attributed to the evaluation of all the elements of the balance sheet
in fair value. In administration, many managers do not accept the use of the
evaluation in fair value in financial reporting. Moreover, several users of
accountancy information - banks and insurance companies are against the principle
of measurement in fair value that supposes the existence of a market value, which
is in fact theoretical, because no market is really efficient in the financial theory
(perfect information, risk aversion, liquidity). If the financial statements were
evaluated at fair value, even if the users of the financial information do not want
this, they would lose any significance and will not be exploited, which could lead
to an opposite result to the one searched.

However, despite this statement, the fair value is the most pertinent measure for the
evaluation of the transactions from the achievement day because it mirrors the
reality of the moment. A study conducted in 2007 by 16 U.S. and international
banks showed that, when satisfactory information is given on risk valuation of the
fair value then, financial transparency is improved (FMI, 2008). However,
according to a study conducted by members of the Chartered Financial Analyst
Institute (the most professional association of the financial analysts in the world),
79% of respondents considered that the evaluation at fair value in the financial
sector increases transparency and allows better understanding of the risks of the
financial institutions.

The global financial crisis that began in earnest in 2007 hits the IASB full-force
during 2008 and continues to dominate its technical agenda in 2010. Fair value
accounting is considered today, in conditions of economic crisis, one of the main
triggers of the crisis (Escaffre et al., 2008). In this regard, the arguments consist of
its pro-cyclical character and insufficient information provided by international
regulatory bodies to the evaluation of financial instruments on inactive markets.
FASB and IASB did not stay in place and tried to change standards and eliminate
these critics. The American government issued on the third of October the act
Emergency Economic Stabilization Act through which it allows SEC to abolish the
application of SFAS 157 for all the entities or for all the assets. Still SEC did not
take this opportunity, but preferred to join FASB to publish on October10th, 2008

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an amendment to SFAS 157 which establishes the determination of the fair value
for a financial asset when the market does not work. As a consequence, on the
thirteenth of October 2008, IASB revised IAS 39 and IFRS 7 “Financial
instruments: Disclosure”. These amendments allow the use of historical cost to
measure the elements, which previously of these amendments were measured at
fair value, through reclassification of the „financial instruments held for trading” to
categories which accounting treatment is reflected in a lack of volatility in the
income statement and balance sheet, excluding impairment. The purpose of these
changes was, on the one hand, to allow financial institutions, particularly banks, to
reduce the impact of current crisis on the financial statements published since the
third quarter of 2008, and on the other hand, to reduce differences between U.S.
GAAP and IFRS on reclassifications (SFAS 115, FASB 1993). The European
Commission adopted on October 16th, 2008 these amendments. Until these
amendments, IAS 39 prohibited any reclassification of the category "financial
assets held for trading" to other categories of financial instruments. Some experts
think that in times of crisis (for example, higher growth rate of interest), fair value
should not be determined based on market value but according to estimates of
future cash flows that can be generated by that item.

2. RESEARCH METHODOLOGY

We often wonder about the reasons which contribute to the choice between one and
another evaluation model (where regulatory body permits), about the quantity of
accounting truth provided by evaluation models. Accounting truth is the
intersection of a compromise between producers of information, statutory auditors
and users of information. We are focusing on producers of information approach,
trying to identify their availability to overcome old habits (historical cost) and to
embrace new ones (fair value).

The objective of this study is to analyse the position of the Romanian accountants
concerning the acceptance of fair value as a single basis in accounting
measurement. To achieve this objective it was used a positive-type research. In
accounting theory and practice have been proposed several bases of measurement
(historical cost, current cost, realizable value, present value and fair value), among
which the most frequently used is historical cost. The habit for a historical cost
accounting, put in question by the current trend to use in measurement current
values, was starting point in the present study.

To achieve the study we conducted a questionnaire survey, presented in appendix,

which was administered during the preparation courses for skills exam in order to
obtain the quality of chartered and certified accountant. Drafting the questionnaire
was preceded by an exploratory survey by interview (1 teacher, 1 chartered
accountant, and 1 doctoral student in accounting). The interviews were included in

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the category of following comments. In continuation of this work we have

validated a set of 10 questions, depending on our consideration of the extent to
which respondents credited the idea of change. Of the 63 people who answered the
questionnaire, 44% were/are chief accountants or business executives, 25% are
accountants, 31% are economists. Concerning the size of the companies where the
interviewed people work, 36% are entities with a turnover < 100,000 euros, 24%
entities with a turnover between 100,000 - 1,000,000 euro, 21% entities with a
turnover between 1,000,000 - 5,000,000 euro and 19% entities with a turnover >
5,000,000 euros.

3. RESULTS AND DISCUSSIONS

3.1. What is the perception of the professional accountant in Romania

on the concept of fair value?

We can see the actual orientation of IASB and FASB to define the fair value as an
exit value. If all the assets and liabilities of an entity would be evaluated at the exit
value, then capital would be equal to the cash that would remain if they had
liquidated all the balance sheet elements at valuation date. It remains to be seen
whether the IASB project on fair value will be approved in the current working
version. The expression of an opinion on the market value of an activity or a group
of assets is a subjective thinking, and therefore the determination of the fair value
generates large differences among specialists. As long as markets are liquid, the
application of fair value does not raise real difficult problems, but in the situation
of illiquid markets, entities must be based on the one hand, the internal models for
calculating this value and on the other hand, the market parameters, which in these
conditions are difficult to estimate.

All three definitions of the fair value include in their content terms such
„exchanged” (IASB), „price”, „sell” (FAS 157, ED) which highlight the fact that
fair value reflects primarily an exit value, identifying itself in most cases with the
value of achievement, more exactly, the selling price. If all assets and liabilities
have evaluated at exit values then the equity would be equal to the cash that
remains after the liquidation and settlement of all the balance sheet at valuation
date.

Based on this reasoning we would have expected that practicing accountants trying
to answer the question "What do you mean by fair value?" had given us the
response: sale price. In response alternatives were presented the four bases of
evaluation, defined by the IASB framework, namely: current cost, sale price,
present value and historical cost. Only 16% of respondents identified the sale price
as the nearest measurement basis for the fair value. The remaining 84% considered
fair value as the current cost (25%) and present value (59%). It is true, that when

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there is no active market or cannot be identified similar assets traded in the market,
the current cost or present value can be used at alternative basis for calculating fair
value.

We consider that these responses, contrary to our expectations, were not a

consequence of thinking in-depth on how to calculate the fair value, but the result
of ignorance of the definition of fair value by the Romanian accountants. However,
it must be appreciated that all respondents consider fair value as a basis of
valuation which reflects the current value of the items. The reason for which we do
this affirmation is the consequence of the fact that no respondent associated fair
value with historical cost. Furthermore, 87% of respondents said that the fair value
measurement reflects in a correct way the economic reality.

3.2. Is fair value used in Romanian accounting practice?

When asking practicing accountants if they use fair value, 41% of them (26
respondents) stated that they do not use fair value in valuation of any balance sheet
item. Instead 43% (27 respondents) of respondents said they use fair value in
measurement of tangible assets. In Romania, Order 3055/2009 concerning
accounting regulations in conformity with European directives specifies:

„Entities may proceed with the revaluation of existing tangible assets at the
end of financial year so that they are presented in the accounts at fair value,
with reflecting the results of this revaluation in financial statements
prepared for that financial year”. Further „Revaluations must be made with
sufficient regularity so that fair value does not differ substantially from that
which would be determined using fair value at balance sheet date”.

In the accounting practice in Romania the entities submit for revaluation only the
land and buildings, due to significant fluctuations in value of these assets. At the
end of financial year, Romanian entities establish inventory value from all balance
sheet items (that is the current value at the end of the year). 11 respondents (17%)
associated fair value with net realizable value for inventories, 10 respondents
(16%) with probable value for trade and other receivables and 6 respondents (10%)
with market value for financial assets that may be associated with financial
instruments.

3.3. Historical cost or fair value? Goal in the preference

of the Romanian accountants

Historical cost reflects the right value of the elements at the initial recognition
moments, being a just value for that date. But once the time passes by, it takes a
really big historical aspect. In a stable economy, most of the accountancy
information users consider the valuation in historical costs the most pertinent

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measurement basis. But the economic parameters, the general ones (power of
buying, interest rate) and the specific ones (the firm profitability) don’t stop
developing. Thus, in a perennial existence in accounts, the historical cost of an
element can’t return, after a specific period, the devoted image of the value that
should be reflected. This fact becomes invisible in inflation conditions, when the
calculated result by accountancy in historical conditions doesn’t reflect reality. It’s
the reason why, in inflation, conditions must give up historical accountancy and
accept accountancy in fair value. At present, internationally speaking, it is tended
to an evaluation in fair values that probably in some years will take place to the
evaluation in historical prices.

However, examining the relationship between historical cost accounting and fair
value accounting in terms of qualitative characteristics of accounting information,
accounting fair values complies in greater qualitative characteristics of accounting
information than historical cost accounting:
1. It is understandable because, at present, it is required, more and more,
the presentation of additional information in the annexes concerning
the way of calculation and recognition the fair value of the elements
related to financial statements;
2. It provides comparable information because items are presented using
the same basis of valuation, namely, the fair value;
3. It is relevant because it helps users in making forecasts of future
financial position and performance of the entity;
4. It is partial true because it largely reflects conditions which must
satisfy the accounting information to be reliable. Instead fair value is
not neutral because it is easy to manipulate, for example by presenting
some current values higher than in reality for the purpose of painting a
favourable image of the entity. In addition, accounting in fair value is
not prudent because it allows recognition, not just of declines in the
values of assets, but also of gains.

The Romanian accountants have shown that they are aware of the benefits of
accounting information in fair values, majority of the respondents, 87%,
considering that they have more confidence in the accounting fair value than the
historical cost accounting. Also, at the question if accounting rules allow the choice
between historical cost and fair value to measure a balance sheet item which
options will be chosen, the percentage was much higher in the fair value option -
92% of respondents, unlike historical cost which was preferred only by 8% of
respondents. It is noted that the current trend towards fair values measurement
seems to have been assimilated by the Romanian accountants who would prefer,
through the work they carry out, to provide relevant information, in exchange for
historical information, even if the latter are easier to obtain.

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Given the current trend for using the fair value measurement in accounting, we
wanted to know for what balance sheet items the Romanian accountants would
prefer to use fair value in measurement. The results obtained from the study could
be summarized as follows:

Chart 1. Preferences in the use of fair value

As noted in the chart above, 71% of respondents believe that fair value should be
used to measure all the balance sheet items. However, as Jianu (2007) stated:

„If we are to build a model accounting with the fair value measurement
basis from all balance sheet items it should be dropped from the criterion of
realization. ... In a fair value accounting model, valuation business
performance over a period will include the realized and unrealized results
which are determined either on market price or on internal estimates. It will
be difficult to distinguish, at this level, between the objective evaluation of
the entity’s management and the external influence of the market value on
balance sheet items”.

At present, the consequences of the fair value measurement, for a part of the
balance sheet items, have materialized in the presentation of comprehensive
income as a primary event reflecting the financial performance for entities (Jianu &
Jianu, 2008). Romanian professional accountants are willing to accept these
substantial changes required by fair-value measurement of all elements of financial
statements in order to offer users more relevant information.

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A percentage of 40% of Romanian accountants who answered to the questioner

expressed a preference for fair value measurement, just for some of the different
categories of items, 21% of respondents believe that only assets should be valued at
fair value, 14% of respondents only debts and 5% of respondents only equity. It is
important to note that only 2% of respondents expressed their desire to use the fair
value measurement of financial instruments. It seems that the term „only the
present matter, the past is forlorn” seems to work in the case of the Romanian
accountants. As it is known in international financial reporting standards, fair value
was first used in 1998 in the measurement of financial instruments with the
appearance of IAS 32 and IAS 39. Another reason why very few respondents
associated fair value with measurement of financial instruments is because the
concept of financial instruments is not applied in the Romanian accounting
practice.

3.4. What difficulties have Romanian accountants in the application

of fair value accounting?

But for the application of fair value, it is not just needed a willingness to do this
thing but also it is needed that Romanian accountants should have the adequate
preparation to determine (measure), to recognise and to present all elements at their
fair value. The study found that Romanian accountants would face the greatest
difficulties in the establishment of fair value, as shown in the chart below.

Chart 2. Difficulties appeared in the application of fair value

Now, the fair value determination is the responsibility of licensed assessors who
have the preparation necessary to calculate this value. At the international level, the
IASB has launched a project seeking to meet professional accountants in providing
specific examples how to calculate the fair value and methodology for calculating
fair value. While most professional accountants face the greatest difficulties in
determining fair value, a part of them consider that the problems are far greater in
recognition items at fair value (11%) that the disclosure information about fair
value in the notes of financial statements (14%).

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CONCLUSIONS

The development of international capital markets and the information needs of

investors questioned credibility and relevance of information presented in financial
statements in a historical cost accounting. To adapt to this new “world”, the
authorities charged with publishing accounting standards have dropped, little by
little, the measurement at historical cost and the principle of prudence, paying
attention on a fair value measurement. Expanding the use of fair value valuation in
accounting was reinforced by the support given to this measurement base by the
two big regulatory bodies: FASB and IASB. The support for the fair value was
made and carried out gradually over time, by including in the accounting standards
the option or the obligation to measure a growing number of elements at fair value.

Romanian economic entities applied, in individual financial statements, accounting

regulations consistent with European directives, regulations under which fair value
is used only in small degree. However, Romanian accountants would desire to
apply a fair value accounting, in order to offer relevant information to users of
accounting information. They recognize that they are not yet ready to apply this
accounting. The biggest difficulty encountered by them is the determination of the
fair value for financial statements items.

ACKNOWLEDGEMENTS

This work was supported by CNCSIS-UEFISCSU, project number PN II-RU

326/2010 Elaborarea şi implementarea la nivelul entităţilor economice din
România a unui model de evaluare bazat pe conceptul menţinerii capitalului fizic.

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APPENDIX
QUESTIONNAIRE

• What do you mean by fair value?

€ current cost
€ sale price
€ present value
€ historical cost

• In the Romanian accounting practice, fair value is used to measure:

€ property plant and equipment
€ intangible assets
€ non-current financial assets
€ inventories
€ debtors
€ current financial assets
€ current financial liabilities
€ trade and tax liabilities
€ other items (specify)…………………………………………….

• If accounting rules allow to choose between historical cost and fair

value to measure a balance sheet item, you will choose:
€ historical cost
€ fair value

• What kind of information do you think that is offered by a fair value

valuation:
€ relevant
€ reliable
€ understandable
€ comparable
€ which properly reflects the economic reality

• If a balance sheet item would be measured at fair value do you believe

that the result would be substantially different from measuring at
historical cost?
€ yes, in the negative way
€ yes, in the positive way
€ no

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• What balance sheet items do you think that should be measured at fair
value?
€ all balance sheet items
€ only liabilities
€ only equity
€ only financial instruments
€ none of the balance sheet items
€ other items (specify)…………………………………………..

• In which accounting do you have more confidence?

€ historical cost accounting
€ fair value accounting

• What is the turnover of the company to which you are employed?

€ < 100.000€
€ 100.000€ - 1.000.000€
€ 1.000.000€ - 5.000.000€
€ > 5.000.000€

• What is your position in the company you work for?

€ accountant
€ chief accountant / financial director
€ economist but not accountant
€ other function (specify)………………………………………

• The company you work for is: :

€ parent
€ subsidiary
€ independent

i
The principles are rules of action that are based on judgment and represent a model (Le petit
ROBERT, 1993).
ii
The rule is a formula of what to do in a situation clearly determined (Le petit ROBERT, 1993).
iii
An active market for the asset or liability is a market in which transactions for the asset or liability
take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

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