To what extent Fair Value is Fair, an Analysis of Reliability and Relevance of the Fair Value Accounting Paradigm.

To what extent Fair Value is Fair, an Analysis of Reliability and Relevance of the Fair Value Accounting Paradigm. Rafael Dugarte Escalante September, 2006 Fair value accounting is fair and important for financial reporting in providing relevant, reliable, comparable and understandable information to the users depending on what kind of information is expected from it, and the way in which fair value is actually found. This study complements the existing literature on the fair value accounting paradigm by identifying its main advantages and weaknesses and by examining to what extent fair value accounting provides relevant, reliable, comparable and understandable source of financial information. Considering the results of the two simulation exercises, this project found out: firstly that mark-to-model fair value analysed on the specific context described in the simulation exercise, has low reliability. The conclusion was reached by selecting the Hull (2006) Credit Default Swap valuation model and feeding it with current information from the Venezuelan market. Secondly, it was found that in the Venezuelan context, when following the model proposed by Enria A et al (2004), fair value accounting can provide more timely information than historical cost accounting, making the reported information more useful. In the same way this research project described in the literature review chapter, the current debate about the weaknesses and strengths of the fair value accounting paradigm. This dissertation was divided into 4 main parts: The first chapter introduces the topic to be developed throughout the current dissertation, and outline the objectives. The second chapter reviews the relevant literature and previous research. The third chapter presents the simulation exercises. And the last chapter introduces the concluding topics