The usefulness of fair value measurement in financial statements of South African listed companies

Abstract

The aim of this research study was to identify the impact fair value measurement would have on the usefulness of financial statements. Since the inception of fair value as a basis of measurement in 1973 it has been a controversial topic with many critics questioning the reliability and relevance of financial information and the role fair value played in the 2008 financial crisis. The objective of the International Accounting Standards Board (IASB) is to provide useful financial statements resulting in information that will assist its users in their decision-making. There is an increasing need to use fair value as a basis of measurement in order to improve the reliability and relevance of financial information, however there is still uncertainty about the usefulness of fair value measurement. The study therefore strived to determine whether the use of fair value as a basis of measurement influences the usefulness of financial statements. This was done by means of analysing the differences between the results of historical cost and fair value used as a basis of measurement in financial statements. The findings of the literature study suggest that fair value as a basis of measurement provides relevant and reliable financial information that contributes to the usefulness of financial statements. The reliability of financial information is dependent on managements’ manipulation and estimates used. The usefulness of fair value financial information is influenced by the overstatement of management estimates used and the misrepresentation of financial statements through manipulation. In the empirical study the financial information including and excluding fair value adjustments were used to gather data by calculating the selected financial ratios for the financial periods 2009 to 2015 of selected Johannesburg Stock Exchange (JSE) listed companies. The interest cover (IC), financial leverage (FL), net current asset value per share (NCAVPS), net tangible asset value per share (NTAVPS) and the equity debt (E:D) financial ratios indicated that fair value measurements had a statistical significant impact on these ratios, thereby affecting the usefulness of financial statements. The possible impact on the users’ decisions based on debt management financial ratios may result in the inability for investors and shareholders to determine the future financial stability of the entity. The capital market financial ratios may cause that investors and shareholders are unable to identify the current capability of the entity to generate profits.