AUDITING FAIR VALUES IN A SENSITIVE SOCIO-ECONOMICAL CONTEXT

The concept of fair value was subject of many debates and disputes in recentyears. These debates have focused mainly on the relevance of the concept, but also on thepractical difficulties in determining reasonable estimates, raising particularly the interest ofpractitioners in terms of identifying the best valuation procedures and techniques,respectively auditing fair values. Determining the fair value involves a broad spectrum ofapproaches, from the simplest to the most complex and burdensome ones. In the currentsocio-economical context, market and stock volatility raises questions about fair values, evenif there are conditions for the existence of market information. The problem gets morecomplicated where fair value is determined based on cash-flows, especially where there areuncertainties about the value and timing of cash-flows and adjustment rates, and the impactof used assumptions related to future conditions, transactions and events.Last but not least, assessment of fair value is based on the going concern assumption, whichmay not be applicable in the context of an economic crisis.The International Financial Reporting Standards (IFRS) provide for financial instruments tobe measured generally at fair value. Because fair value is primarily assimilated with marketprice, its assessment requires the existence of a market able to operate under normalconditions, or in other words, sufficiently liquid to assess the price of financial instruments.And, one of the features of the current crisis consists in the significant decrease of liquiditieson the market, which in turn caused a high impairment of derivatives (those based onAmerican real estate). As American real estate can never be zero, market prices are not thereal ones. However, this situation highlights the volume of liquidities available to buyers,which is a feature of imperfect markets. But the International Financial Reporting Standardsdid not anticipate the effects of liquidities on financial instruments, as their development isbased on perfect functioning of financial markets. Under these circumstances, fair valuemeasurement started to be increasingly criticised, and the International AccountingStandards Board (IASB) has changed the rules for measurement of financial instruments atfair value.Given the high degree of volatility, auditors should ensure that valuation methods andassumptions used by management under normal conditions for determining fair values areappropriate in a sensitive socio-economical context as well, and that the valuation modelincludes also the effects of subsequent events.fair value, historical costs, fair value audit, volatility, economic crisis