Accounting 5 (2019) 91–100

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Accounting
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Fair value accounting and reliability of accounting information of listed firms in Nigeria

Oyebisi Ibidunnia* and Wisdom Okerea

aDepartment
of Accounting, Bells University of Technology, Ota-Ogun State, Nigeria
CHRONICLE ABSTRACT

Article history: This study examined the association between fair value accounting and reliability of accounting
Received August 3, 2018 information. The study adopted survey research along with quantitative methods. Users of the
Received in revised format accounting information represented by corporate investment analysts and corporate portfolio
August 23 2018
managers were the respondents for the purpose of this study. The population size was one
Accepted September 7 2018
Available online hundred and sixty-one (161) users of accounting information decomposed into one hundred (100)
September 7 2018 corporate investment analysts and sixty-one (61) corporate portfolio managers. The primary
Keywords: source of data was employed with the structured questionnaire as an instrument used to collect
Fair value accounting the data. Data was collected through the administration of 161 copies of the questionnaire to both
Historical cost corporate investment analysts and corporate portfolio managers. One hypothesis was formulated
IFRS and was tested using the Pearson product moment correlation technique at a significant level of
Relevance 5% and 10% while the Statistical Package for Social Science (SPSS) was engaged to analyze the
Reliability data. Findings revealed a significant association between fair value accounting and reliability of
accounting information of the firms in Nigeria. Hence, the study recommended that adequate and
regular training programs and conferences on fair value accounting application have to be
organized. This is because most of the employees of the companies in Nigeria did not understand
how to use fair value in an inactive market, appropriately. Thus, it is of great importance that
they were trained to understand different valuations and estimation techniques of fair value; how
and when to apply them in the measurement of assets and liabilities in the financial statement.

© 2019 by the authors; licensee Growing Science, Canada

1. Introduction
The practice of companies for closing its books of account while preparing and presenting its annual
income statement and balance sheet has been accomplished using accounting periodicity for several
years. Over the years, organizations have come to learn and accept the concept of Historical Cost
Accounting, which is a traditional system based on the double entry principle that reports transaction
cost at the original price. While this method of measuring assets and liabilities in the financial statement
has several benefits such as objectivity, reliability and ability to provide conclusive evidence, it has
however been criticized on the basis that it fails to account for changes in price level of company’s
assets over a period of time. As a result, assets are presented at prices sometimes lower than the
realizable price, thereby leading to a reduction in the reliability and relevance of accounting
information. It has also been observed that, it is not a good approach to be used in inflationary market
* Corresponding author.
E-mail address: [email protected] (O. Ibidunni)

2019 Growing Science Ltd.

doi: 10.5267/j.ac.2018.09.004

 
 
 
 
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in addition to which it provides information that are only reliable but not relevant to decision making
and it provides medium for profit smoothing and gains trading by managers by hiding excess reserves,
amongst others (Betakova et al., 2014). Because of these drawbacks in historical cost accounting,
accounting standard setters in 1980 saw a need for a paradigm shift from historical cost accounting to
fair value accounting. This shift was further strengthened by various financial scandals that rocked
some corporations such as Xerox in 2000, Enron in 2001, Worldcom in 2002 and Pamalat in 2003 and
in Nigeria amongst others Oceanic Bank, Intercontinental Bank, Afribank and Cadbury (Okere et al.,
2017). This shift to fair value accounting was presumed to bring an improvement over the historical
cost accounting and it was believed it would correct the lapses encountered under historical cost
accounting. According to IFRS 13, 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”. Fair value is expected to provide financial accounting information with high level
of decision-usefulness and information relevance of accounting information (Procházka, 2011). It is
also expected to eliminate opportunity to take advantage of gain trading and assets securitization with
this resulting to an increase in the quality of financial reporting. Of all the benefits derivable from fair
value accounting application, one of the perceived advantages is in its potential to reduce the ease of
manipulating accounting numbers (CFA, 2007). There has been a major debate between fair value
accounting and historical cost accounting since there have been arguments that historical cost is more
reliable and less relevant while fair value is more relevant and less reliable. Unfortunately, relevance
and reliability of accounting information are the two fundamental qualities of accounting information
as revealed in the works of Ojeka et al. (2016), Schipper (1991) etc. Major opponents of fair value
accounting have argued overtime that market based values are to a very large extent free from
manipulations and as such can be said to be reliable and since fair value makes use of market values
and it can therefore be presumed reliable. This means that fair value has the ability to help eliminate
any such opportunity available for management to manipulate earnings while historical cost model, on
the other hand, allows firms to prepare and present accounts in such a way that income could easily be
managed (Shaffer, 2011). Unfortunately, even though fair value accounting has the ability to eliminate
management’s tendency of manipulating earnings, it has been argued that only level 1 fair value is free
from such manipulations (as they are market value of assets and liabilities from an active liquid market).
The same does not hold for Level 2 and 3 fair values as they are subject to manipulations, estimation
errors and miscalculations and they are based on management judgment and model estimation. Fair
value accounting would have been reliable and useful for decision making if markets for assets and
liabilities were liquid and transparent. Unfortunately because several assets and liabilities do not have
an active market, subjective and unreliable inputs and methods (based on management’s judgment) are
used to estimate fair value with this leading to tendency of account manipulations (Bies, 2005). As
attested to by Emerson et al. (2010), these manipulations have brought about by the use of managerial
judgment can result in the effect that fair value accounting was introduced to eliminate. In spite of the
absence of active and liquid market, proponents of fair value accounting believe that fair value
accounting is reliable and historical cost accounting can no longer faithfully represent the economic
realities of today’s complex instruments (Jones, 1988). In a study by Elfaki and Hammad (2015), it was
found out that fair value accounting when compared to historical cost accounting enhances reliability
of accounting information. According to Fattouh (2016), fair value accounting plays a vital role in
enhancing the quality of accounting information embodied in the increment of reliability and
appropriateness. This therefore raises a question on whether or not fair value accounting has an
association with reliability of accounting information.
Because of this inconsistency and mixed evidence in literature, this study seeks to examine the
significant association between fair value accounting and reliability of accounting information of listed
firms in Nigeria. The remaining part of this research is organized in four parts. Section 2 comprises a
review of extant literatures on fair value accounting and reliability of accounting information. The
method employed in proffering solution to the research questions raised is contained in section 3 of this
research study while the result of the data obtained and analyzed from the copies of the questionnaire
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distributed is provided in section 4. Conclusion and recommendations are contained in section 5 of this
research work.

2. Literature Review

2.1 History of IFRS

The first step towards International Accounting Standards was the formation of The International
Accounting Standards Committee (IASC) in 1973. In 2001, the IASC reorganized and created the
International Accounting Standards Board (IASB). The IASB is expected to develop International
Financial Reporting Standards (IFRS), which are accounting standards promulgated after 2001, and to
enforce the use of each standard (International Accounting Standards Board, 2010). Because of the
growth of global markets, the desire of multinational companies for one set of financial statements, and
the demand for one common global reporting language, the FASB and the IASB issued the Norwalk
Agreement in 2002. This agreement marked their commitment to developing a single set of high-quality
standards that would decrease cost, increase efficiency and provide better information for investors
(Paul & Burks, 2010).
In creating IFRSs, the IASB worked with national standard-setters to advance and encourage the
adoption of IFRSs through the convergence of National Accounting Standards and IFRSs. IIFRSs set
out recognition, measurement, presentation and disclosure requirements dealing with transactions and
events and they are important in general financial statements. They may also set out such requirements
for transactions and events that arise mainly in specific industries. IFRSs are based on the conceptual
framework, which addresses the concepts underlying the information presented in general purpose
financial statements. Despite the fact that the conceptual framework was not issued until September
2010, it was produced from the past Framework for the Preparation and Presentation of Financial
Statements, which the IASB adopted in 2001.
IFRSs are designed to apply to the general purpose financial statements and other financial reporting
of profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial,
financial and similar activities, whether organized in corporate or in other forms. They include
organizations such as mutual insurance companies and other mutual co-operative entities that provide
dividends or other economic benefits directly and proportionately to their owners, members or
participants. Although IFRSs are not designed to apply to not-for-profit activities in the private sector,
public sector or government, entities with such activities may find them appropriate. The International
Public Sector Accounting Standards Board (IPSASB) prepares accounting standards for governments
and other public sector entities, other than government business entities, based on IFRSs. As at today
there consists of seventeen IFRS and forty-one IAS, of which some have been superseded. Over, more
than 12,000 companies in almost a hundred countries of the world have adopted IFRS. These countries
either require or permit IFRS as the basis for financial statement preparation by public companies like
in the case of Nigeria.
2.2 Concept of Fair Value Accounting

The primary qualities of accounting information are relevance and reliability, the two criteria to
enhance the usefulness of the financial report. Fair Value Accounting (FVA), thus, fair value
measurements have placed the greater function in financial statements because this information is
perceived as more relevant to investors and creditors than historical cost information. In recent years,
international standard setters and regulators such as the International Accounting Standards Board
(IASB) and the Financial Accounting Standards Board (FASB) have begun to favor the use of Fair
Value Accounting over Historical Cost Accounting in financial reporting. A key reason for this shift in
methodology is to improve the relevancy of the information contained in financial reports. The general
principle underlying the shift is that up-to-date information improves investors' and regulators' abilities
to make informed decisions (Kaur, 2013).
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The International Accounting Standard Board (IASB) defines fair value as ‘’an amount at which an
asset could be exchanged between knowledgeable and willing parties in arms-length transaction’’
(IASB 2008). IFRS 13, Fair Value Measurement, sets out a single framework for measuring fair value
and provides comprehensive guidance on how to measure it. It is the result of a joint project conducted
by the IASB together with FASB, which led to the same definition of fair value as well as an alignment
of measurement and disclosure requirements to FAS 157. Both FAS 157 and IFRS 13 define Fair Value
“as the price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date”. This definition of fair value reflects an exit price option, which is the market
price from the perspective of a market participant who holds the asset. Moreover, fair value must be a
market-based, not an entity-specific measurement, and the firm’s intention to hold an asset is
completely irrelevant (Betakova et al., 2014). For instance, the application of a blockage factor to a
large position of identical financial assets is prohibited given that a decision to sell at a less
advantageous price because an entire holding, rather than each instrument individually, is sold
represents a factor, which is specific to the firm. If observable market transactions or market
information are not directly observable, the objective of fair value measurement still remains the same,
that is to estimate an exit price for the asset, and the firm shall use valuation techniques (Betakova et
al., 2014). Fair value accounting has turn out to be the preferred option of accounting for financial
instruments as against historical cost. The significant explanations behind this inclination are: (a) cost
is not relevant or understandable, (b) measuring financial instruments at fair value is practical, (c) fair
value eliminates issues which arise from using the cost method, (d) fair value is not overly different to
the current practice, and (e) the benefits of fair value are obtainable at a reasonable cost (Hancock,
1996).
However, critics of fair value accounting are concerned that fair value may be less reliable than
historical costs since managers may use their discretion to manipulate the information (Ahmad, 2000).
As a result of this, investors could be unwilling to base valuation decisions on these subjective estimates
(Barth, 1994). It is also view that fair values may increase the volatility of income as compared to
historical costs (Barth et al., 1995; Feay & Abdullah, 2001). For example, in Australia, ED 59 Financial
Instruments was criticized by the banking industry, which opposed market value measurement method.
The banks were concerned that market value may increase the volatility of earnings (Hancock, 1996).
2.3 Fair value accounting and Reliability of accounting information

According to IASB, the main objective of financial reporting is to provide information that is useful to
existing and potential investors, lenders and other creditors in making decisions about providing
resources to the firm (IASB 2010). Although financial reporting users include large numbers of
subjects, both the FASB and IASB focus on the needs of participants in capital markets. This is because
investors are considered those who are mostly in need of information from financial reports, given that
they cannot usually request information directly from the firm.
The findings of Markou and Tsitsoni (2013) on “Fair Value Accounting and earnings quality” revealed
that application of Fair Value Accounting in financial reporting increases the reliability and accuracy
of such information provided in the financial statement with this increase leading to effective decision
making. Faraj (2012) investigated analytical study of the fair value measurement under accounting
standards - A field study. The study asserted that the application of fair value accounting affects the
high quality of accounting information. Elfaki and Hammad (2015) carried out a study on “The impact
of the application of Fair Value Accounting on the quality of accounting information: An empirical
study on a group of companies listed on the Khartoum Stock Exchange”. Engaging ANOVA, the
findings of the study revealed that Fair Value contributes to the provision of useful information to users
of accounting information and help them in decision-making. The study furthermore revealed a positive
relationship between fair value application and reliability of accounting information; a positive
relationship between the application of fair value accounting and the relevance of accounting
information in decision making. Alnajjar (2013) embarked on a study that investigated the impact of
 O. Ibidunni and W. Okere / Accounting 5 (2019) 95

the application of Fair Value Accounting on the reliability and relevance of the accounting information
in Palestinian company’s financial statements. By surveying the opinions of external auditors and
financial managers of companies in Palestine, the study revealed that the Fair Value Accounting
application increases the reliability and relevance of the accounting information in the financial
statement. In another study by Fattouh (2016) on “the role of replacing Fair Value Accounting with the
principle of historical cost in enhancing the quality of accounting information”, the study found out
that Fair Value Accounting increased both the reliability and the relevance of accounting information
with this making it more useful for users of accounting information in making effective decisions.
Alaryan et al. (2014) on the relationship between Fair Value Accounting and presence of manipulation
in financial statements. Using the annual reports of forty-five (45) companies during a ten-year period
of five years before and five years after the adoption and application of fair value accounting, the result
of the study revealed that a higher number of firms manipulated accounting report after the adoption
and application of fair value accounting compared to the number of firms before Fair Value adoption.
Hence the quality of accounting information is higher before adoption of fair value accounting as
compared to after adoption.

3. Methodology
The purpose of this study is to examine the association between Fair Value Accounting and reliability
of earn accounting information of listed firms in Nigeria. The descriptive research study was adopted
for the purpose of this research as this type of research design enables the provision of accurate
information on events, situations or persons. It attempts to describe a situation, problem or phenomenon
with a view of providing information on them (Olaogun 2008). The quantitative method was adopted
as this method is presumed more accurate and precise because of the fact that it develops and tests
theories, hypotheses and mathematical models in addition to examining relationships between
variables. The respondents for this study were the Capital Market Operators represented by Corporate
Investment Analysts and Corporate Portfolio Managers. The Corporate Investment Analysts and
Corporate Portfolio Managers were selected as respondents for this study because according to
literature (such as Schipper, 1991; Bercel, 1994; Healy & Palepu, 2001; Clement & Tse, 2003;
Mangena, 2004) they are the principal users of financial statements with this requiring them to have
such accounting knowledge that would enable them analyze financial statement for effective and
efficient decision making purpose. This group was furthermore selected because they are also primary
users of financial accounting information in addition to being representative of other users of
accounting information (Oyerinde, 2011). Based on this, it could be reasonably argued that the urge to
use a company’s financial report is higher for investment analysts and portfolio managers than for any
other user (Iyoha, 2011).

The population size for this study includes one hundred and sixty-one respondents decomposed into
one-hundred Corporate Investment Analysts and sixty-one Corporate Portfolio Managers. Those in the
category of middle/top management staff who are actively involved in the preparation and presentation
of the financial statement formed the target audience for the purpose of this study. The floor of the
Nigerian Stock Exchange (NSE), Lagos was the main sampling point for the purpose of this study as it
is the oldest of all Stock Exchanges in Nigeria. In addition, of a total of 161 Corporate Investment
Analysts and Corporate Portfolio Managers, Lagos has the highest number of Corporate Investment
Analysts and Portfolio Managers with 149 of them (representing 92.5%) having their headquarter
located in Lagos. The remaining 12 were located outside Lagos State with 9 (representing 5.59%)
having their headquarters located in Abuja, 1 (representing 0.621%) in Abeokuta, Ogun State,
1(representing 0.621%) in Edo State and the last one (representing 0.621%) has its location in Kano
State. The study adopted the census approach (where population size equals the sample size) in
determining the sample size. Using the census approach, the sample size was one hundred and sixty-
one respondents.
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The study engaged the primary source of data with the research instrument being a survey
questionnaire. The questionnaire was divided into two sections; the first section comprised eight items
representing one major construct “Reliability”. This section focused on such questions that pertain to
Fair Value Accounting and reliability of accounting information. The section on the other hand
comprised questions on the respondent’s bio-data which are (name of organization, sex, age, highest
academic qualification, highest professional qualification, job position). The questionnaire was
designed using the five-point Likert scale rated 5 (Strongly Agree), 4 (Agree), 3 (Indifference), 2
(Disagree) and 1 (Strongly Disagree). The content validity was engaged for the purpose of ascertaining
whether or not the research instrument (the questionnaire) measures what it ought to measure. To
engage content validity, the questionnaire was reviewed by experts and independent assessors both
within and outside the field of accounting (Okpala, 2012). The Person Product Moment Correlation
Technique, a parametric technique used to test the relationship between two variables was used to
examine the significant association between Fair Value Accounting and Reliability of accounting
information.
4. Results

4.1 Reliability of research instrument

Table 1
Reliability Statistics
Cronbach's Alpha Cronbach's Alpha Based on Standardized Items N of Items
.800 .840 40
Source: Field Survey (2017)

Reliability analysis is arrived through the examination of the proportion of systematic variation in a
scale. Cronbach alpha is a reliability test for internal consistency since it increases because of an
increase in the inter correlations among the items in the analysis. From Table 1 above, the scale items
were found to be reliable for the constructs of this research study. The combine reliability of all items
in the research instrument gave a reliability statistics of 0.8, which surpasses Pallant’s (2005) reliability
benchmark of 0.7.
Table 2
Questionnaire administered and retrieved
S/No Respondents Total Total % Total Total not % Total not
Categories Distributed Retrieved Retrieved Retrieved Retrieved
1 Portfolio Managers 61 47 77.05 14 22.95
2 Investment Analysts 100 95 95 5 5
TOTAL 161 142 88.2 19 11.8
Source: Field Survey (2017)

Table 2 reveals a breakdown of copies of the questionnaire administered and retrieved from the
respondents. One hundred and sixty-one copies of the questionnaire were distributed to the respondents.
Of this one hundred and sixty-one, one hundred was given to Corporate Investment Analysts while
sixty-one was given to Corporate Portfolio Managers. Out of the one hundred copies of the
questionnaire given to Corporate Investment Analysts, ninety-five representing 95% of the total copies
administered was retrieved. Also, of the sixty-one copies of the questionnaire administered to Corporate
Portfolio Managers, a total of forty-seven copies of the questionnaire representing 77.05% of the total
copies administered were retrieved thereby leaving the number of total copies retrieved at one hundred
and forty-two representing 88.2% of the total copies administered. Five (5) copies representing 5% of
the one hundred (100) copies administered to Corporate Investment Analysts was not received while
fourteen (14) copies representing 22.95% of the sixty-one (61) copies administered to portfolio
managers was not received. This leaves the total of copies of the questionnaire not received at 19
representing 11.8%.
For the purpose of this study, one hypothesis was formulated and stated in the null form:
 O. Ibidunni and W. Okere / Accounting 5 (2019) 97

H0: There is no significant association between Fair Value Accounting and Reliability of accounting
information of listed firms in Nigeria.
This hypothesis was tested using the Pearson Product Moment Correlation Technique and the result is
stated below:

Table 3
Correlations
Rel 1: Reliability 2: Reliability 3:
FVA 1 Neutrality FVA2 FVA 3 FVA 4 Faithful Rep Verifiability FVA5
Assets and liabilities that are measured at Pearson Corr 1 .234** -.127 .037 .011 -.276** .175* -.002
fair value do not provide information with Sig. (2-tailed) .005 .131 .660 .897 .001 .037 .978
high level of reliability. N 142 142 142 142 142 142 142 142
Accounting information provided in Pearson Corr .234** 1 .258** .243** .191* .105 .186* .145
financial statement prepared on a fair value Sig. (2-tailed) .005 .002 .004 .023 .215 .026 .084
accounting basis can be said to be neutral. N 142 142 142 142 142 142 142 142
By virtue of current market information Pearson Corr -.127 .258** 1 .344** .229** .316** .145 .169*
provided in the financial statement under Sig. (2-tailed) .131 .002 .000 .006 .000 .084 .045
fair value accounting, confidence of users N
142 142 142 142 142 142 142 142
of accounting information have risen.
Information prepared under fair value Pearson Corr .037 .243** .344** 1 .284** .378** .079 .255**
accounting basis is to a large extent free Sig. (2-tailed) .660 .004 .000 .001 .000 .351 .002
from material errors and bias. N 142 142 142 142 142 142 142 142
There is an association between fair value Pearson Corr .011 .191* .229** .284** 1 .435** -.124 .328**
accounting and reliability of accounting Sig. (2-tailed) .897 .023 .006 .001 .000 .141 .000
information. N 142 142 142 142 142 142 142 142
Fair value based financial statement Pearson Corr -.276** .105 .316** .378** .435** 1 -.074 .291**
contains accounting information which is a Sig. (2-tailed) .001 .215 .000 .000 .000 .381 .000
representation of reality. N 142 142 142 142 142 142 142 142
Accounting information in financial Pearson Corr .175* .186* .145 .079 -.124 -.074 1 -.023
statement prepared using Fair Value Sig. (2-tailed) .037 .026 .084 .351 .141 .381 .782
Accounting can be easily verified. N 142 142 142 142 142 142 142 142
In all, increases in the relevance of Pearson Corr -.002 .145 .169* .255** .328** .291** -.023 1
information provided by financial Sig. (2-tailed) .978 .084 .045 .002 .000 .000 .782
statements based on FVA outweigh any N
reduction in the reliability of such 142 142 142 142 142 142 142 142
information.
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Table 3 shows the association between fair value accounting and reliability of accounting information.
The three sub-properties, sub-characteristics and dimensions to reliability are: verifiability, faithful
representation and neutrality. Hence, the first dimension of reliability of accounting information that
was statistically tested alongside fair value accounting is neutrality. The results from the table show
that there was a correlation effect between fair value accounting and neutrality. Statistically, accounting
information provided in financial statements prepared on a fair value accounting basis can be said to
be neutral (r = 0.234, p ≤ 0.01). Also, because of current market information provided in the financial
statement under fair value accounting, confidence of users of accounting information can be said to
have risen (r = 0.258, p ≤ 0.01). There are also statistical evidence to the fact that information prepared
under Fair Value Accounting basis is to a large extent free from material errors and bias (r = 0.243, p
≤ 0.01). Moreover, there was an established association between fair value accounting and reliability
of accounting information (r = 0.191, p ≤ 0.05). Furthermore, accounting information in financial
statement prepared using Fair Value Accounting can be easily verified (r = 0.186, p ≤ 0.05).
Another dimension of reliability of accounting information that was used in this study is faithful
representation. Statistically, the relationship between fair value accounting and faithful representation
was revealed. For example, Table 3 above shows that there was a relationship between faithful
representation and the rise in confidence of users of accounting information that are presented using
current market information which fair value accounting provides (r 0.316, p ≤ 0.01). Moreover, the
association between faithful representation and fair value accounting is shown by the extent to which
information prepared under fair value accounting basis is free from material errors and bias (r = 0.378,
p ≤ 0.01). Statistically, it was shown that there is an association between Fair Value Accounting and
reliability of accounting information (r = 0.435, p ≤ 0.01). Generally, Table 3 revealed that increases
in the relevance of information provided by financial statements based on Fair Value Accounting
outweigh any reduction in the reliability of such information (r = 0.291, p ≤ 0.01). The third dimension
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of reliability of accounting information used in this research work is verifiability. The results in Table
3 show an association between verifiability and fair value accounting.
Decision: Based on the Pearson Product Correlation tables above, the null hypothesis of “there was no
significant association between fair value accounting and reliability of accounting information” was
rejected as the Table 3 shows that accounting information under Fair Value Accounting is reliable at
the three dimensions (neutrality, verifiability and faithful representation).
4.2 Discussion of Findings

Hypothesis 1 stated in its null form states that “There is no significant association between Fair Value
Accounting and Reliability of accounting information of listed firms in Nigeria”. To test this, Pearson
Product Moment Correlation Technique was engaged and as a result, the alternate hypothesis which
states that “there is a significant association between Fair Value Accounting and Reliability of
accounting information of listed firms in Nigeria” was accepted. This empirical finding is consistent
with the result of a research carried out by Fattouh (2016) whose study revealed that FVA plays a vital
role in enhancing the quality of accounting information that is embodied in the increment of reliability
and appropriateness. The findings of other researchers such as Alnajjar (2013), Elfaki and Hammad
(2015) amongst others also revealed a significant association between FVA and Reliability of
accounting information

5. Conclusion and Recommendation

5.1 Conclusion
Traditionally, reliability of accounting information lies on the verifiability of accounting numbers. An
explicit factor that motivates the use of fair value is in its perceived ability to reduce the tendency of
manipulating accounting numbers. This implies that market based values (which is fair value) are
largely (especially level 1 fair value) free from manipulations and as such are highly reliable (CFA
Institute, 2007). Although, critics of FVA have capitalized on the fact that only level 1 fair value are
free from manipulations while level 2 and 3 which are based on management’s discretion are subject
to estimation errors and manipulations, Level 2 and 3 fair value estimation and manipulation problem
can however be counter measured through an increased disclosure of the underlying assumptions
engaged in the course of estimating Fair Value. Fortunately, this increased disclosure requirement has
been implemented in the recent IFRS 13 (Fair Value Measurement). In addition, the strength of
corporate governance of companies and strong internal control system can also be another
countermeasure as according to Song et al. (2010), the strength of corporate governance and internal
controls can reduce the problem of less reliable fair value inputs. This point was further stressed when
CFA Institute (2007) opined that management through the use of strong corporate governance and
internal control system can increase the market’s view of the accuracy of their measurements. With this
in place, overtime, confidence in such measures will be enhanced. Furthermore, with these measures
in place, reliability of accounting information will in no time be enhanced under Fair Value Accounting.

5.2 Recommendations
Based on the findings of this study, the following recommendations were made:
1. Regular training programs and conferences on fair value accounting (most importantly the valuation
techniques and how to apply them) should be organized for staff of companies. This is because it
was observed that most staff of companies in Nigeria do not understand how to appropriately use
fair value in an inactive market. Thus, it is of great importance that they are trained as this would
help them understand the different valuation and estimation techniques of Fair Value; how and
when to apply them in the measurement of assets and liabilities in the financial statement.
2. Because of the high level of subjectivity that comes with using fair value, there is a high tendency
that prices can be distorted because of market inefficiencies, liquidity problems or investor’s
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irrationality (especially level 3). Thus, there should be an expansion of the disclosure of such
accounting information prepared using fair value as this would of course aid user’s better
understanding on how some assets/liabilities values were arrived at and the valuation technique
used. In lieu of this, listed firms should be encouraged and required to engage IFRS 13 (Fair Value
Measurement) increased disclosure requirement, as this would enhance user’s reliability of
accounting information.

Acknowledgements

The authors would like to thank the anonymous referees for constructive comments on earlier version
of this paper.

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