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Effect and implication of ‘FVA’ on users of financial statement in Nigeria




This statement which says things are not are not always as they seem on the first sight and that good things (fair) can sometimes turn out to be bad (foul) and vice versa (Shakespear).

 Also centuries later, the statement is still valid when it is transferred to the recent developments in financial accounting. According to this, the basic shift from local GAAP accounting systems to the International Financial Reporting Standards (IFRS) in most developing countries like Nigeria provided the preparers of financial statements with an option that was not that common before under local GAAP requirements. To date, fair value accounting for certain assets and liabilities is viewed as a major feature of IFRS and several standards either require balance sheet items to be measured at fair value or at least provide an option to fair value measurement instead of applying historical cost accounting.

Fair Value Accounting is a financial reporting approach in which companies are required or permitted to measure and report on an ongoing bases, certain assets/liabilities (generally financial instruments) at estimates of the prices they would receive if they were to sell the assets or would pay if they were to be relieved of the liabilities. It primarily applies to financial assets and liabilities but however, three major groups of non-financial assets-property, plant, investment property and intangible assets –also subject to fair value measurement.

Besides the fact that the fair value approach, since its first appearance, has long been subject of academic research, the recent financial and economic crisis has turned the amplified attention on fair value accounting and led to a considerable policy debate involving among various countries.

In recent years, Fair Value Accounting (FVA) has made substantial headway in news outlets as it has been a popular element at the forefront of current accounting issues. Moreso, usage patterns of fair value accounting have been frowned upon igniting the debate amongst accounting professionals. In reality, fair value accounting and quality of earnings are subjects that always trigger interest, particularly in the Nigerian environment. With FVA becoming an essential feature of International Financial Reporting Standards (IFRS, accounting for assets and liabilities at market prices can produce results that sometimes dramatically change the underlying dynamics for certain businesses and activities (ICAZ, 2010), particularly during volatile and uncertain economic and market conditions (Bernanke, Ben & Gertler, 1999) such as prevailing in Nigeria.

The limitations inherent in fair-value accounting do not detract from the usefulness of fair-value measurements in providing a consistent starting point in analyzing financial statements .The imperfect nature of FVA underscores the need for financial statements to be complemented with additional information about uncertainties in the measurement of assets and liabilities.

Fair values in financial statements were blamed of being rather foul than fair and thus, as it stands in contrast to the term by itself, not of great advantage for users of financial statements. The critics argued that fair value accounting has significantly contributed to the financial crisis and exacerbated its severity especially for financial institutions in Africa and around the world. Despite of the massive criticisms of fair value accounting that came up with the financial crisis, it is unlikely that the financial statement preparation policy may returns to the use of a strictly traditional historical cost accounting environment.

The introduction of the concept of fair value has meant a change from the classic principles of the accounting system based on prudence and reliability.

Predominantly,Fair value accounting is more relevant than historical cost because of it up to date information and its consistency with market, thereby increasing

Transparency and encourage prompt corrective action.

As a result of this challenges, the research study pose to examine and explore the conceptual foundation of fair value accounting by users of financial statement in various organisations.


Many blamed fair value accounting for being responsible for one of the financial and economic crises in Nigeria Financial System. The drop in price of many financial assets measured at fair value led banks to write down the carrying values reported in their balance sheets, thus negatively affecting their capitalization ratios. To consequently improve their capitalization ratios and to comply with regulatory requirements, these banks started to sell securities which even magnified the downdraft in quoted prices and additional devaluations of financial assets became necessary.

The turmoil in the financial markets turned the fair value debate, which was before mainly of academic importance, into a debate of public interest. Even if this debate was focused on financial institutions and the valuation of financial instruments, there are further applications of fair value accounting. In this sense, IFRS permits, to a certain degree, tangible assets to be measured at fair value instead of historical cost. Reporting entities may thus voluntarily recognize land or building that is categorized as investment property or assets of property, plant and equipment (PPE) at fair value.

Thirdly, opponents assume that fair value accounting are potentially misleading and do not provide relevant information, especially for assets that are possessed for a long period of time or even until maturity, they also argues that, fair values which are based on a model instead of available market prices do not provide reliable information and that fair values contribute to the pro-cyclicality of the financial system.

This might be an important issue especially in the case of fair value accounting and needs to be considered when the implications of fair value accounting for users of financial statements are investigated.

Though, the concept of FVA emerged to cover gaps existing in the historical cost accounting (Holt, 2008). Historical cost accounting has co-existed with major corporate collapses and tremendous pressure from users of financial reports prompting the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) to refocus attention from historical cost accounting towards FVA (Rayman, 2007), thus the world at large is affected by this move in one way or another. In the face of Nigeria being such a volatile economy, FVA has found its way there. Therefore, it is essential to consider ‘FVA’ in Nigeria’s context.

Furthermore, There is lot of controversies surrounding the use of fair value accounting but we shall limit ourselves to four basic issues:

 (i)The usefulness of Fair Value Accounting

(ii)Awareness of Fair Value Accounting issues

(iii)Audit Challenges associated with Fair Value Accounting, and

 (iv) Appropriateness of Fair Value Accounting.

Many are of the opinion that the contractual and transaction cost incentives existed to identify any fair value components of goodwill such as brands and intangibles.

Finally, Kumarasin (2011), outline concern over the implementation of Fair Value Accounting in developing countries such as Nigeria, as evident from the need for the Accounting Standard Board to make request for impute on the application of FVA in emerging and transition economies.


The major objective of this study is to explore the overall effect and implication of ‘FVA’ on users of financial statement in Nigeria,

Other specific objectives include:

·        Identify how fair value is measured in this inflationary economy with a very sizeable market (for shares and property investments).

·        ascertains the benefits and limitations associated with this accounting phenomenon

·        determine the perceived roles of fair value accounting on financial reporting

·        ascertain alternatives of this method and forecasts the prominence and

endurance of FVA.

·        Examine the impact of the application of fair value accounting on the reliability of accounting information

·        Explore the problems affecting the application of fair value accounting by users of financial statement.

1.4            RESEARCH QUESTION:

The following research questions were asked in the project study:

·        How is fair value measured in the inflationary economy with a very sizeable market (for shares and property investments)?

·        What are the benefits and limitations associated with this accounting phenomenon?

·        Is there any perceived roles of fair value accounting on financial reporting

·        Alternatives of this method and forecasts the prominence and endurance of Fair value Accounting?

·        Impact of the application of fair value accounting on the reliability of accounting information?

·        Problems affecting the application of fair value accounting by users of financial statement?


Researcher seeks to test the validity of the following hypothesis:


Hi: Nigeria capital market structure do not pose a challenge to implementation of fair value accounting


Hi: There are no significant relationship between fair value accounting and financial statement of organisation.


As stated above, fair value information is included in IFRS financial statements, which have the main purpose to serve the informational needs of current and possible future investors. Even if the standard setters often use the general term investor in order to outline the scope of IFRS, it is expected that the users of financial statements differ largely with regard to their profession and skills in evaluating accounting information. As such, financial statements are used by professional investors, such as funds managers or financial advisors, as well as by nonprofessional investors where every individual only holds a few shares of the regarding company.

This research study, will presents a framework that can be used as a practical tool for teaching and learning existing and emerging standards on fair value accounting. It will also identifies financial instruments, including the basic ones which can be defined in terms of assets, liabilities, and owners’ equity, and the derivative instruments which may be based on contingent events and may require special treatment.

The study contributes to the existing literature addressing Fair Value Accounting issues particularly in a developing country like Nigeria. The study is considered unique at least in Nigeria because it also considers FVA auditing issues from the perspective of the auditors themselves. There is no doubt fair value accounting auditing issues will continue to be of interest in Nigeria, just like in other countries of the world.

This study will provide an additional insight into the accounting literature, and provided useful input to audit profession, research academic, and related governmental departments such as Income Tax and Companies Controlling Department.

Finally this study will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic.


From the foregoing discussion, the framework of the research work encompasses on the overall effects and implication of fair value accounting on users of financial statement in Nigeria (especially the Capital Market).using the accountant, auditors, investors of companies listed on  the Nigeria Stock Exchange Market as case study.

The limitation envisage in the process of the research work includes:

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