Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

Abstract

Purpose The purpose of this paper is to discuss whether fair value accounting fits for long-term equity investments, which are considered key to retool economies according to sustainability criteria. In doing so, the paper focuses on the European Union and addresses the European Commission’s (2018a) concern that current accounting rules are unfit for achieving the United Nations Sustainable Development goals and the targets of the Paris Agreement on climate change. Design/methodology/approach The paper grounds in a wide literature review on the effects of fair value accounting on investors’ asset allocation strategies. By critically integrating literature on the notion of long-term investment with theories and possible accounting approaches, the paper provides implications for a revision of the current measurement system for long-term equity investments. Findings The literature review supports the view that fair value accounting has played a role in discouraging equity investments over time, thus leaving economies with poorer risk-sharing and weaker long-term investments. The paper contributes to the debate on alternative measurement systems by suggesting possible solutions in relation to controversies arising from empirical evidence. Originality/value Reorienting economies according to sustainability criteria represents an urgent issue which requires prompt and policy-oriented responses. Accordingly, this paper offers insights and guidelines that can help policymakers revise current accounting rules for long-term equity investments in line with sustainable development objectives.

Fair value accounting implementation challenges in South Africa

“…In total, 20 South African accountants, experienced in implementing fair value accounting requirements, were interviewed. The findings complement existing studies on fair value that deal mainly with developed economies, are quantitative or involve fair value's history, ideology, assumptions and appropriateness (Barlev and Haddad, 2003; Penman, 2007; Whittington, 2008; Power, 2010; Georgiou and Jack, 2011; Palea and Maino, 2013; Brousseau et al , 2014; Durocher and Gendron, 2014; Zhang and Andrew, 2014; Barker and Schulte, 2017; Chen et al , 2017; Haswell and Evans, 2018; Palea, 2019).…”

“…Initially, respondents indicated that disclosures are fundamental for users' understanding of how businesses create value for investors (R2, R3, R5, R6, R7, R10, R13, R17 and R19). Respondent 10 went so far as to argue that the disclosure of fair value was more useful than recognising changes in the values as part of the accounting system, sentiments echoed by Palea (2019). These views were, however, contradicted.…”

“…Much of the prior literature on fair value accounting focuses on its history, ideology, its underlying assumptions and whether it is appropriate or not (Barlev and Haddad, 2003; Penman, 2007; Whittington, 2008; Power, 2010; Georgiou and Jack, 2011; Palea and Maino, 2013; Brousseau et al , 2014; Durocher and Gendron, 2014; Zhang and Andrew, 2014; Barker and Schulte, 2017; Haswell and Evans, 2018; Lev, 2018; Palea, 2019). Despite the fact that prior literature examines tensions created by fair value accounting (Whittington, 2008; Ravenscroft and Williams, 2009), few researchers address the practical challenges of implementing fair value accounting requirements.…”

“…Despite the fact that prior literature examines tensions created by fair value accounting (Whittington, 2008; Ravenscroft and Williams, 2009), few researchers address the practical challenges of implementing fair value accounting requirements. Most of the existing implementation papers adopt quantitative methodologies and provide a solid grounding for more qualitative studies (see christensen and Nikolaev, 2009; Palea and Maino, 2013; Du et al , 2014; Badenhorst, 2015; Alexeyeva and Mejia-Likosova, 2016; Ayres, 2016; Palea, 2019; Oyewo et al , 2020; van Zijl and Hewlett, 2021). In addition, these studies have been conducted, on the whole, on developed economies.…”

“…The research answers directly the call for more interpretive research, which sheds light on the functioning of accounting in real-world settings (Napier, 2001) and accounting research conducted in Africa (Rahaman, 2010). Most of the existing literature deals with fair value accounting in an American (Du et al , 2014; Cannon, 2015; Ayres, 2016; Glover et al , 2017), European (Palea and Maino, 2013; Alexeyeva and Mejia-Likosova, 2016; Palea, 2019) or Asian (Peng and Bewley, 2010; He et al , 2012) context. To begin addressing this gap, data for this study are collected via 20 semi-structured interviews with South African financial reporting experts.…”