Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER EIGHT

Fair Value Accounting

FAIR VALUE CONSIDERATIONS

Throughout this section on asset-based financial reporting fraud schemes, the term fair value has been used extensively. The measurement of fair value is critical to the application of numerous accounting standards associated with assets, as well as with certain liabilities, covered later. A significant amount of professional judgment is required with many fair value measurements. As a result, this is an area that is very susceptible to manipulation and fraud.

Under U.S. GAAP, fair value is defined 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 (an exit price). The term market participant excludes related parties.

Until the issuance of IFRS 13 in 2011, the IFRS definition of fair value was “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's-length transaction.” This IFRS definition and the explanation of fair value concepts were spread out among several standards.

But with the release of IFRS 13, a comprehensive standard on fair value now exists. IFRS 13 will be effective for annual periods beginning on or after January 1, 2013. The IFRS 13 definition of fair value is identical to the U.S. GAAP definition just provided. Most other concepts in IFRS are consistent with those found in U.S. GAAP. Accordingly, a detailed comparison will not be provided here. ...