A comparative analysis of the usefulness of fair value in measuring the financial instruments of South African banks

M.Comm.The debate around the usefulness of fair value as a basis for measuring financial instruments has become increasingly topical and, in recent times, has attracted the attention of various market participants as a result of the global credit crisis which developed during 2007. The qualitative characteristics of relevance and reliability are central to any analysis regarding the usefulness of fair value as a financial instrument measurement basis. This study therefore investigates the relevance and reliability of the fair value measurements disclosed by the four largest South African banks in their 2008 annual financial statements in order to determine whether fair value is the most useful basis for measuring the majority of the financial instruments of South African banks. The financial instrument categories and fair value hierarchy defined in International Financial Reporting Standards (IFRS) are used to perform a content analysis on the 2008 annual financial statements of the banks included in the study, in order to conclude on the relevance and reliability, respectively, of the financial instrument fair values provided. Collectively, an analysis of the financial instrument categories applied and an investigation of the differences between the fair values and carrying values of financial instruments not measured at fair value suggest that fair value is not the most relevant basis for measuring the majority of the financial assets of all of the banks included in the study, and is also not the most relevant basis for measuring the majority of the financial liabilities of three of the four banks included in the study. Based on their fair value hierarchy classification, the fair values of the majority of both the financial assets and financial liabilities of the banks included in the study were not found to be reliable. Fair value was therefore not found to be the most useful basis for measuring the majority of the financial instruments of three of the four banks surveyed, while the findings for the fourth bank were inconclusive in this respect. Keywords: Fair value, financial instruments, usefulness, relevance, reliabilit